U.S. economy at risk of double-dip recession

By Emily Kaiser - Analysis

WASHINGTON (Reuters) - The U.S. economy appears destined for several years of weak growth and high unemployment that leave it vulnerable to a recession relapse after the massive dose of government stimulus wears off.

While tepid growth looks likely to resume late this year and build modestly into 2010, the credit bust has left households and businesses unable or unwilling to borrow and spend as freely as they did before the crisis.

The U.S. government has stepped in as lender and spender of last resort, but its deep pockets are not bottomless. Waning political and investor appetite for taking on more debt could stand in the way of any additional big spending plans.

"When you remove the government stimulus, what the private sector can generate in terms of growth feels like a recession," said Jeffrey Rosenberg, head of global credit strategy at Banc of America Securities Merrill Lynch in New York.

Rosenberg thinks the U.S. economy may trudge along at a sluggish growth rate somewhere in the range of 0.5 percent to 1.5 percent while banks recover from the credit crisis, which could take another three years.

"If that's what you're able to generate, that economy is not generating the job growth required to bring the unemployment rate down," Rosenberg said.

This is a much darker outlook than the one put forward by President Barack Obama's administration in its latest budget projections, which show economic growth bouncing back to 3.2 percent next year and hitting 4.6 percent by 2012.

It also calls into question the staying power of a recent stock market rally. The Standard & Poor's 500 is up more than 30 percent from an early March low.

The gloomier scenario assumes that banks take years to recover from losses that some economists think could reach $4 trillion; consumers curb borrowing and spending as they repair the $11.2 trillion hole blown through their savings last year; and the explosion in government debt drives up interest rates.

If the forecast proves accurate, it would leave the economy susceptible to a shock, such as a big jump in oil prices, and could force the United States to issue even more debt than investors expect. That would likely increase borrowing costs, both for the government and the private sector.

NEVER SAY NEVER

Typically, deep recessions are followed by powerful recoveries because when demand finally returns, companies quickly ramp up production. That helps explain why Wall Street has been feeling optimistic about recovery prospects.

However, recessions caused by financial crises have a history of being long, deep and difficult to fully escape.

Treasury Secretary Timothy Geithner said on Thursday that the current crisis was "caused in large part by too much borrowing and too much lending. And the adjustment process of that will be difficult."

How difficult that adjustment will be depends to a large degree on how dramatically consumers alter their behavior.