Firming economic indicators such as falling unemployment rates won't keep improving in 2012, as underlying demand for goods and services hasn't made significant advances, says Laura D’Andrea Tyson, former chairwoman of the Council of Economic Advisers under President Bill Clinton.
The economy is set to grow by around 2.5 percent in 2012, which is not enough to absorb the millions of unemployed Americans on top of those who have quit looking for work but will jump back into the labor market in the future.
Furthermore, spikes in consumer spending have come from people dipping into savings to shop on occasion and not due to improvements in economic fundamentals.
"The central problem remains inadequate aggregate demand — both at home and around the world. The shortfall in demand is reflected in unutilized resources, notably unemployed and underemployed workers and idle plant and machinery," Tyson writes in a New York Times piece.
"The level of output in the United States is now higher than it was in the fourth quarter of 2007 but still far below the level that could be produced if existing resources were fully utilized. A recent Treasury estimate puts the gap between actual and potential output at more than 7 percent — or more than $1 trillion of goods and services."
Furthermore, savings need to increase, political bickering over spending needs to end and calls for austerity in the U.S. must go.
"The danger in 2012 is not too much fiscal stimulus, but too much fiscal austerity. The same danger is stalking Europe and could lead to a sovereign default by a euro-zone country and the breakup of the euro," Tyson writes.
"Such an event, considered unthinkable just a few months ago but viewed as a real risk now, would plunge Europe and the United States into recession, with negative reverberations throughout the global economy."
The Federal Reserve's most recent Beige Book, a group of summaries on the nation's economy, shows the economy is slowly recovering.
"Compared with prior summaries, the reports on balance suggest ongoing improvement in economic conditions in recent months, with most districts highlighting more favorable conditions than indentified in reports from the late spring through early fall," the report finds, according to the AFP newswire.
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