Why the economy could still tank in 2012

After the elections, Congress will have to make some momentous decisions about taxes, spending and extending the nation's borrowing limit. Missteps could be disastrous.

By MSNMoney partner Apr 10, 2012 12:08PM

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.

More from US News

Apr 10, 2012 1:19PM
Will there be a collapse? Absouletly!! As a student of economics for over 20 years is no debate. The debt build-up is beyond belief - is astronomical Is time to pay the piper, multiples are not even remotely within reason. The idiots on Wall Street think the sky is the limit, but they are proven idiots. Wall Street supposed forecasters think that the build up of debt upon more build up of debt is good. There has been economic crashes in the past, 1837, 1873, 1929. But the powers to be   have an interest to make money at the expense of the fish - the American public.   
Apr 10, 2012 5:05PM

I've been posting this for years- this economy is done-finished.  First all the jobs disappear, then there will be food shortages. Most Americans will be broke and hungry, which means you will be nothing more than slaves at the mercy of the government.  What a hellish future we have to look forward to.

This is what happens when people get fat, dumb and lazy and allowed this to happen over time.

Apr 10, 2012 6:30PM

We've been "kicking the can down the road" for years.  This country has only been able to do that because it prints and prints and prints inflated dollars.  I believe Washington has simply figured out that as long as the lower and middle class is buried in the details of trying to make a living, we'll be too occupied to demand our government be held accountable.  These guys make great money, have incredible benefits, and retire with pensions regardless of how poor they perform.  Its really unbelievable what a great sham they can get away with.

Apr 10, 2012 3:36PM

As the collapse worsens and many more are suffering, I predict calls for criminal charges of congressional members who have taken us where we are - and rightfully so.


They are not stupid - they did it knowingly.

Apr 10, 2012 4:04PM
Regardless of who is at fault, Obama and crew are not helping at all.  Four more years of him and the entire world could be bankrupt.
Apr 10, 2012 4:31PM

It's not that complicated. The so-called recovery was a talked up mainstream media myth with a Fed supplied temporary sugar high. Remember the "recovery summer" that also went nowhere?

Whoever wins in November, won't change the outcome of a failed stimulus combined with health care legislation that scares employers from hiring.

Until jobs come back, housing and the consumer can't fully recover.

Food stamps don't go far for the record amount of people on them, and the rest of us not on them are dealing with stagnant wages and/or reduced hours.

The miscalculation was the focus not being on jobs from the start. Passing health care was not only historic, but a  historic blunder. It's important, but wasn't the first priority.

For this the administration and congressional majority at the time still risk being held responsible.

Apr 10, 2012 3:08PM

It is sad that oboma keeps spending money like it is water. he has spent more than the last 10 presidents combined. he is ruining this country and yes. it will fall. and yes it will be because of what oboma is doing.

the only hope if there is one at this point is oboma must be romoved from office. voted out.. government spending has to be stopped, it is out of control.

it is our only hope.

the greed in this adminstration is sad to watch. ruining people future and the American dream to line his own pockets. very very sad.

Apr 10, 2012 4:16PM

The economy should have been allowed to correct, instead these idiots thought pumping trillions into the economy would avoid the problem.  Stupid liberal Keynesian economics fails again. 


Now the economy still has to correct yet we are trillions farther down the hole.  When this thing crashes it will be far worse than 2008, perhaps worse than the depression itself.


Unfortunately, the longer it goes on, the worse the pain to correct it, so the less likely anyone will stick his neck out for a real solution.  The most damning thing democrats did was demonize Ryan's plan.   Thanks to their playing politics with our future, we are less than a decade from Greece and no one will dare put forth anything to stop it.

Apr 10, 2012 3:51PM
It wasn't Obama who kept out of a depression it was billions in stimulus money. It was not wisely used and was given to business friends of the government who mostly caused the giant recession.  Their should have stipulations on what the stimulus money was to be used for when given to the Banks & Goldman Sachs. With the housing industry hit the hardest in 50 years and the wealth of the average American in the gutter it should have been used for home loans. With the welfare slackers living it up and the seniors hurting this president has got to go.
Apr 10, 2012 3:18PM

With obama record, why has there been no impeachment hearings?  Any other president that pulled the same crap he has would have been thrown out of office by now.


People need to start seeing through this guy, and what a disaster he is.  We just can't continue to let the go.


I am not sure we can hold out until November.

Apr 10, 2012 3:44PM
Someone don't be so stupid as to think that blaming past Presidents will make current Presidents seem any better. The current one has been in office for almost  4 years now. Time for another change.

Apr 10, 2012 3:21PM
Apr 10, 2012 3:56PM
People really get saying what a great job Clinton did, just look what Clinton did, The economy was going in the tank when Clinton left office, 9/11 was planned on Clinton watch,the military budget was cut, nobody was talking  between the FBI and the CIA.The dot com bubble burst on Clinton watch, so just what did Clinton do that so great, he got a **** in the oval office and BS his way through two terms. BTW I voted for him the second time, what was I thinking?
Apr 10, 2012 4:48PM
Based on my understanding of the interrelationships of energy and finance, I think we face decades of economic contraction.  The era of economic growth is ending.

I don't think the economic "laws" of the past will be present in the future.  Economic growth depends on growing energy production, and resources of many kinds.  We are are at or near the peak in global oil production, and the world as a whole will soon leave the more-or-less plateau stage and enter the decline stage. I think we are reaching the
limits of a growth-based economy and that's why this recent recession is a lot different than past recessions.  Despite conventional thought,
growing energy production/use and resource consumption can't continue indefinitely. Don't have faith that the stock market will continue to
grow on a long-term basis.

Some suggested reading for those uninformed about peak oil/end of

The End of Growth, by Richard Heinberg

Ultimately, we are facing a predicament, not a problem.  Problems can be solved.  Predicaments can only be dealt with.  Both political parties
are avoiding the truth of the deeper mess we're in, and the truth about our energy predicament.
Apr 10, 2012 6:05PM
Of course the market will tank. It has been artificially inflated by STIMULUS. All that has happened is money has been dumped in the hog trough for the big hogs to feed on. Its over now expect a crash. Move to cash or bonds.
Apr 10, 2012 4:13PM
Don't be fooled folks. Our government as well as other world leaders have worked for years to get us to this point. They are all in this together. Their goal is a total financial collapse, one world government & one world currency. Then watch out! No more freedom for no one!
Apr 10, 2012 7:00PM
As long as this country and others think that all they have to do is print and borrow more money to forestall the inevitable things will only get worse. The so-called experts can't find their own car in the parking lot let alone solve a serious problem like the financial mess this country is in right now, they helped put us there. It seem like the more education some people get the dumber they become.
Apr 10, 2012 7:47PM
The recovery went in my gas tank with gas at $4.20 a gallon I don't have any fun  money. Thanks to our inept governement. Lets keep borrowing money from China and sending all our jobs there.
Apr 10, 2012 6:37PM

I hope the economy does collapse about the time I have to refinance the mortgage on the farm!  Much better rates!! 

More seriously, anybody that doesn't believe another collapse is coming at some point is a fool...

Apr 10, 2012 3:45PM
Everyone can keep blaming this President, or that President, or this party or the other party, but the truth is, not a single one of these entities actually have any direct control.  Our Government, no matter who has been the leader, can prolong a fall into economic ruin, but history shows that the longer a DEPRESSION is held off, the longer and deeper it goes when it finally DOES happen.  The economy has a life of it's own, and as such, is cyclic.  There is a horrendously boring book about economic history I had to read in college.  It examines cycles in the economic health of society, dating back to when some Italian dude invented dual entry accounting.  Chronologically, we are due for another depression, or even over-due.  Consider: if the Government had not bailed out the banks, they would have failed, exactly like they did in the great Depression.
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[BRIEFING.COM] The stock market welcomed the new trading week with a mixed session that saw relative strength among large-cap stocks, while high-beta names underperformed. The Dow Jones Industrial Average (+0.3%) and S&P 500 (-0.1%) finished near their flat lines, while the Nasdaq Composite and Russell 2000 both lost 1.1%.

Equities began the day on a cautious note amid continued concerns regarding the strength of the global economy. Over the weekend, China reported its first decline ... More


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