Why the economy could still tank in 2012

By Rick Newman

Hey, did you happen to see where the recovery went?

For a while there, it looked as if jobs were returning, the housing market was close to bottoming out and consumers were growing more confident about their own economic outlook. But then came a disappointing jobs report, a three percent stock market correction and renewed fears that the recovery would fade.

Many economists feel the choppy nature of the recovery, which officially began in 2009, is normal given debt problems that still exist and other aftershocks from the recession. In that view, markets will remain volatile, but continue to gradually improve.

But there's still plenty to worry about, and the lack of transparency on several big problems makes investors jumpier than they might otherwise be, causing mood swings in the stock market. Here are five things that could still go wrong with the economy:

Weaker earnings at U.S. companies. Big firms have been a bright spot in the economy, with strong profits coming from stringent cost-cutting, low interest rates and other factors. That rosy period may now be ending. Earnings at S&P 500 firms grew by 14 percent in 2011, according to Briefing Research, but are estimated to have grown just three percent in the first quarter of 2012. That's largely because there are no more easy cuts to make, and earnings are now being compared to healthier numbers from a year ago.

Earnings at U.S. firms directly affect hiring, spending plans and consumer confidence, so weaker earnings could foretell a slower recovery. As first-quarter earnings reports come in over the next several weeks, investors will cheer if firms exceed modest expectations. But lackluster earnings will deepen worries about the economy.

A deeper European recession. Aggressive maneuvers by the European Central Bank have forestalled the financial crisis many investors dreaded, but Europe's economy remains fragile and prone to shocks. Europe could muddle through 2012 without a deep recession, but austerity budgets in many countries leave little room for error.

Those debt problems dominating financial headlines aren't over, either. Investors have begun to fret anew about Spain's solvency, which is forcing the European nation to pay higher rates on its debt. Beyond that, Moody's Analytics predicts that Portugal may need a second bailout by 2014, and Greece a third one by 2015.

A Chinese meltdown. China has an overheated property market, an opaque banking system and an overdependence on exports to troubled regions like Europe. Chinese ministers have been adept at navigating through such shoals, but any problem that pushed China's economic growth rate below eight percent could reverberate in other markets.

A further spike in oil prices. This is a binary story, centered on Iran. If the standoff over Iran's nuclear program escalates, worries about oil supplies will intensify and prices will rise. Oil prices, which have been hovering between $100 and $110 per barrel, would probably have to hit the $125 mark before it would threaten another recession. If there's some sort of détente with Iran, by contrast, it could deflate oil prices and boost the economy.

A debacle in Washington. Nothing major is likely to happen in Washington before the November elections, but right after that, Congress will have to make some momentous decisions about taxes, spending and extending the nation's borrowing limit. Missteps could be disastrous for the still-fragile economy. Some political analysts point out that feuding legislators tend to pull together for the public good at the last minute. But business leaders and investors have their doubts. And for now, their votes count the most.

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