Oh no! Another recession?

Economic growth is slipping again. Growth in China and the eurozone has weakened. In the United States, it inched along at a feeble 0.4 percent annual rate in the first quarter and 1.3 percent in the second. Job creation has been anemic. Retail sales have been tepid, with no evidence of a coming upswing.

This makes a new recession a distinct possibility. With growth rates so weak, it will take less of a shock to push the economy into negative territory. An economy rising at a 4 percent annual rate can weather a shock that cuts growth by two percentage points and still be growing. But with a 2 percent annual rate, the economy would probably dip back into recession – and transform the political landscape for lawmakers of all stripes.

Several potential shocks could knock the economy off its feet (see my April 4 column, "A fragile recovery – and five shocks that threaten it"). Among them: a surge in energy prices, the eurozone financial crisis, the financial fallout from Japan's earthquake and tsunami, and a hard landing in China. The most likely culprit is a further 20 percent drop in house prices because of the depressing effect of an excess inventory of 2 million or more unsold homes.

A price drop of that magnitude would push the share of underwater mortgages (where homes are worth less than the amount owed on them) from 23 percent to 40 percent of all mortgages. That would seriously depress consumer spending, wreak havoc among mortgages and related securities, and push the unemployment rate back into double digits.

A weak economy – much less a recessionary one – would no doubt evoke a response from Washington. No government – left, right, or center – can endure high and chronically rising unemployment for long.

So job-creating tax cuts and spending increases are likely in 2012 and probably beyond. Consequently, I expect $1 trillion-plus deficits to persist for years. And that's apart from the longer run deficit problem caused by the aging postwar babies as those folks become increasingly dependent on the federal government for income.

Sure, the Republicans and other conservatives are dead set against further spending. But all of them, including the tea party folks, want to be reelected next year.

That's unlikely if their constituents face rising unemployment and see their representatives doing nothing to help them.

What form might fiscal help take? The release in June of 60 million barrels of crude oil from strategic stockpiles was probably politically motivated, so count that as Round 1.

Round 2 might involve further extensions of unemployment benefits. The maximum is 99 weeks, and many are reaching that limit. Furthermore, the Obama administration is considering extending the cut in payroll taxes for employees beyond its 2011 year-end expiration and extending it to employers.

Another possibility is a government program to buy underwater mortgages or otherwise reduce their values so homeowners would no longer owe more on their houses than they're worth. This subsidy would be highly controversial since it risks angering those who acted prudently by keeping their loan-to-value ratio low. Also angry would be those Americans who are putting cash in to reduce their principal when they refinance.

Slow growth is hard, as Americans have found out. No growth would be even harder.

•A. Gary Shilling is president of A. Gary Shilling & Co., an economic consulting firm in Springfield, N.J. His latest book is "The Age of Deleveraging."