Perhaps the biggest risk to the economy comes from outside the U.S. Economist David Levy argues the country already is heading into a recession, dragged down by an economic breakdown in China and other emerging markets.
He sees the global economy suffering a worse downturn than it did in 2008, when output dropped by about 2 percent. While the U.S. is relatively better off than much of the rest of the world, it’s not strong enough on its own to withstand the hit from abroad, added the chairman of the Jerome Levy Forecasting Center in Mount Kisco, New York.
A big danger, according to Levy, is the Fed’s limited ability to counteract any economic weakness.
In and around the 2001 recession, the U.S. central bank cut its target federal funds rate 5.5 percentage points, to 1 percent in 2003. From 1990 to 1992, it reduced it 5.25 points to 3 percent.
The Fed’s target for the rate that commercial banks charge each other for overnight loans currently stands at just 0.25 percent to 0.5 percent after the central bank raised it in December for the first time since 2006.
"We are not positioned for something that could really throw us down very hard, but we’re also not positioned to have the same kind of policy support that we normally get when we go into recession," Kasman said.
The upshot, according to Jan Loeys, JPMorgan’s chief market strategist: The slump, if it occurs, "is more likely to be a drawn-out U, even if it’s not as deep, than a big, sharp V."