Citing risks from the European debt crisis and budget tightening at year-end, the odds the U.S. will slip back into recession next year are increasing, according to ratings agency Standard & Poor's.
The ratings firm raised the chance of the U.S. falling into recession to 25%, up from a 20% chance estimated in February, as the economy struggles to recover.
"Economic activity has downshifted sharply from earlier this year," S&P said in a report this week on North American credit conditions amid global uncertainty. "At the same time, possible contagion from the European debt crisis, the potential so-called 'fiscal cliff', and the risk of a hard landing for China's economy have added greater uncertainty to US economic prospects."
The firm also pointed to the looming possibility of the government being forced by existing law to severely cut spending and increase taxes on January 1, the so-called fiscal cliff that would crunch the economy.
In the second quarter ended June 30, the U.S. economy grew at a 1.5% annual rate, a sharp fall from late last year as unemployment remained stuck above 8%.
S&P underscored concern about the impact of a recession in the 17-nation eurozone, whose economy contracted 0.2% in the second quarter. S&P forecast a 0.6% contraction this year.
Still S&P reports its baseline scenario for the U.S. economy remained "modest growth," projecting a gross domestic product expansion of an estimated 2.1% for this year. S&P also said it expected that politicians would agree before year-end to change the current severe budget cut and tax hike mandates to avoid the fiscal cliff fate.