Tags: Feldstein | US | Risk | Recession

Harvard’s Feldstein: US Still at Risk of Recession

Wednesday, 19 Oct 2011 09:33 AM

Economic indicators in the United States are improving but the economy still remains at risk of falling back into recession, says Harvard economist Martin Feldstein.

Default scares in Europe won't trigger a fresh downturn, despite many fears to the contrary, Feldstein tells CNBC.

"We will be adversely affected by a significant slowdown in Europe, but it looks like our banks are OK, our money funds can get out of whatever exposure they have. I don't think the bad news in Europe is the reason for our weakness here. I think our problems here are very much homegrown," Feldstein says.
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Economic growth has been recovering in the U.S., although the economy is far from robust thanks to a weak jobs sector.

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Martin Feldstein
(Associated Press photo)
"The third quarter is certainly better than the first half of the year, when we had less than 1 percent annual rate of growth. Still these are not great numbers. Employment over the last four months has averaged about 60,000 extra jobs. We need 150,000," Feldstein says.

"The only reason the only the unemployment rate isn't rising is that more people are not looking or dropping out of the labor force. So I think the third quarter will look good primarily because July was a good month. September was not too bad. August was awful. But looking ahead I think the fourth quarter is not going to be as good as the third quarter."

Consumer spending, the motor of U.S. economic output, has been recovering although a return to prioritizing paying down debts and forgoing fresh purchases could tip the economy back into contraction.

"Remember what's been driving consumer spending is they have been cutting the savings rate. If they stop doing that, then we don't get the extra consumption because there is no income there, there's not credit there so the danger is there is that we could easily slip into negative numbers."

Focusing on Greece, Feldstein says no amount of policies and rescue funds in the world is going to prevent Greece from defaulting.

The numbers are just too disheartening.

"There's no question that Greece is going to default. There's no way that with a debt-to-GDP ratio of 150 percent and rising by 10 percentage points this year, with unemployment in double digits and GDP falling at a very fast pace that they can go on the way they have been."

The country should consider leaving the eurozone should its neighbors allow it to do so in a controlled manner.

"I think if they can do it without being punished by the rest of E.U. members, that would be a good thing for them."

Federal Reserve officials, however, say improving economic indicators suggest a double-dip recession is growing increasingly unlikely.

"Let's not talk ourselves into believing that enduring weakness or recession is inevitable," says Atlanta Federal Reserve Bank President Dennis Lockhart, according to Reuters.

"Much of the incoming data have exceeded most forecasters' low expectations."

One top forecaster puts the odds of a new recession at 40 percent.

The European debt crisis, a weak housing sector and political brawls in Washington are threatening U.S. recovery, says Mark Zandi, chief economist at Moody's Analytics.

"Policymakers on both sides of the Atlantic must intervene," Zandi says, according to The Lookout, a Yahoo news blog.

"In our baseline outlook, the U.S. will avoid recession only because we expect policymakers to act in the next few months."

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Economic indicators in the United States are improving but the economy still remains at risk of falling back into recession, says Harvard economist Martin Feldstein. Default scares in Europe won't trigger a fresh downturn, despite many fears to the contrary, Feldstein...
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Wednesday, 19 Oct 2011 09:33 AM
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