WASHINGTON A gradual broadening and strengthening of U.S. growth should cushion the American economy against severe damage from the storms in Europe, unless a financial meltdown causes global havoc.
Economists forecast that a mild euro-zone recession, widely thought to have begun in the fourth quarter, will shave a few tenths of a percentage point from U.S. gross domestic product growth in 2012 -- not enough to throw recovery off course.
What is far harder to predict is the potential impact of a cataclysmic event, such as a Lehman-style financial collapse in Europe possibly brought on by one country quitting the 17-member euro zone currency union.
Following are possible scenarios of how the sovereign debt crisis in the euro zone could affect the U.S. economy:
MILD EURO-ZONE RECESSION:
Euro zone economy contracts by about 1 percentage point in late 2011/early 2012 and then posts very slow growth, which already is built into many forecasts.
IMPACT: Lowers U.S. GDP by 0.1 to 0.2 percentage point in first half of 2012.
Trade is the primary channel through which the U.S. economy is hit. The euro zone is the United States' third largest export destination, accounting for 15 percent of total U.S. exports. But the U.S. economy is relatively closed and euro zone exports accounted for only 2.1 percent of total U.S. economic activity in the second quarter, according to the latest available figures from the U.S. Commerce Department.
As the U.S. recovery has gathered momentum, it has grown less dependent upon trade. International trade has contributed 1.1 percentage points to total GDP growth since the recession ended in 2009, almost triple the post-war average, Deutsche Bank said. But export growth has slipped to 5.8 percent in the third quarter of 2011, year over year, from a peak of 13.5 percent in the second quarter of last year. Deutsche forecasts it will slip further to 3.9 percent by end of this year.
"If household consumption and business investment spending continue to pick up, as we project, then exports will play a less critical role over the next several quarters," said Deutsche economist Carl Riccadonna said.
PROTRACTED EURO-ZONE RECESSION:
A deeper and longer recession in the euro zone would spill over to other U.S. trading partners, marginally weakening the U.S. growth picture. But as long as domestic demand continues to gradually improve in the United States, the impact should be limited since international trade is not the primary engine of U.S. growth.
A serious slowdown throughout the European Union would lessen its import appetite, hurting China. The European Union is China's largest export market, so a euro-zone recession would cause a slowdown in China, dragging down other Asian countries which increasingly feed China's manufacturing machine, and thus would drive a global economic slowdown.
Wells Fargo estimated that a slowing Europe would dampen demand for commodities, hitting coal mining in West Virginia and precious metals in Utah.
Auto and aircraft parts manufacturing in Kentucky, Connecticut, Washington, South Caroline and Alabama would be affected. Key service sectors also are likely to be affected -- tourism, finance, entertainment, software and engineering. This would hit New York, California Florida, Texas and the Carolinas.
Mark Vitner, Wells Fargo senior economist, predicts a rolling euro-zone crisis that affects the U.S. economy like a low-grade fever, not bad enough to fell it.
"We are really going to be bumping along from crisis to crisis," he said. "I can't see European leaders allowing it to fall apart, and I can't see them fixing it either."
A disorderly sovereign default that causes a 40 percent decline in world equity prices, a widening of credit spreads by 350 basis points in some euro-zone countries, plunging business and consumer confidence, and a global downturn.
IMPACT: U.S. GDP growth lowered by 2.05 percentage points in 2012 and by 2.77 points in 2013, accompanied by deflation or disinflationary pressures. Unemployment, currently at 9 percent, would rise by at least two percentage points in 2013. Developed country GDP would be 5 percent lower by 2013.
The OECD is the first agency to provide a detailed forecast of the possible impact of the euro-zone crisis spiraling out of control. The picture could turn even uglier, depending upon the policy response. If euro area countries stuck to their fiscal tightening, a further 2.5 percentage points would be robbed from U.S. GDP in 2013; and if one or several countries were seen at risk of leaving the euro zone, higher interest rates on debt and bank runs would add to instability. Exit would cause political, economic and market upheaval.
"Such turbulence in Europe, with the massive wealth destruction, bankruptcies and a collapse in confidence in European integration and cooperation, would most likely result in a deep depression in both the exiting and remaining euro area countries, as well as in the world economy," the OECD said on Monday.
The U.S. Federal Reserve provided a similar taste of how severe an impact a Lehman-style event could have when it asked U.S. banks last week to test their resiliency against an 8 percent contraction in U.S. GDP and unemployment climbing to 13 percent. That was the size of hits the U.S. economy suffered after Lehman collapsed.
However, economists point out there are some factors to offset the worst-case scenario. Households and businesses have deleveraged significantly, putting their balance sheets in a stronger position to withstand a downturn than three years ago, and the economy is less dependent on the housing sector.
Businesses also are sitting on large piles of cash, which they could use as a buffer to support employment and investment if they expected only a short-lived hit, the OECD said. U.S. inventories are lean, and most banks have rebuilt their capital, limiting the contractionary impact.
As a result, the U.S. economy has proven itself able to withstand a worsening of financial market conditions in recent months. The S&P 500 stocks index has tumbled 12 percent over the past six months as the euro-zone crisis deepened and the cost of insuring unsecured five-year U.S. bank debt against default has doubled since July on spillover concerns, yet U.S. growth has gathered pace.
"You could slide into a growth recession but you wouldn't see the scale of decline in growth we saw during the Lehman crisis," Riccadonna said.