Tags: Shilling | Fed | Recession | economy

Shilling: Forget the Fed’s Growth Prediction, Recession Still Looms Ahead

Friday, 27 April 2012 08:24 AM

Economist Gary Shilling says the Federal Reserve's view of more U.S. economic growth ahead is distorted.

In an updated forecast Wednesday, the Fed predicted that the economy will grow between 2.4 percent and 2.9 percent in 2012. That compares with its forecast in January, when it estimated growth this year between 2.2 percent and 2.7 percent.

The Fed said Wednesday that economic growth should "pick up gradually" — a somewhat brighter view than it offered last time. It said the job market has strengthened slightly but that unemployment remains elevated. And it pointed to a pickup in inflation but said it should be only temporary.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

Meanwhile, bullish investors may point to a 25 percent rise in the S&P 500 index from its October 2011 low, but "consumers, not investors, set the tone for the economy," Shilling writes in The Christian Science Monitor.

"On the consumer side, the risks are tilted toward the downside."

Even though the U.S. economy has been fueled in recent months by strong consumer spending, the pace doesn't look sustainable, says Shilling.

"Personal income growth continues to be weak – up just 0.2 percent in February – meaning this recent exuberant consumer spending is being fueled largely by increased debt and further dipping into savings," says Shilling.

Consumer spending is the only major source of strength in the American economy this year, Shilling points out.

“On the other side of the scale several weaknesses are piled up: State and local government spending remains depressed by deficit woes and under-funded pension plans; excess capacity restrains capital spending; and recent inventory-building appears involuntary,” he says.

“So it should not come as a surprise if a consumer retrenchment tips the balance toward a moderate – and overdue – recession.”

Other experts agree that the U.S. economic outlook is troubled.

Economist and former U.S. Secretary of Labor Robert Reich says the double dip recession in Europe could well cross the ocean to the United States.

"A recession in the world's third-largest economy, combined with the current slowdown in the world's second-largest (China), spells trouble for the world's largest," Reich writes in his blog.

"Wall Street banks are enmeshed into a global capital network extending from Frankfurt to Beijing," says Reich, who served in three national administrations and was a secretary of labor under President Bill Clinton.

"That means that notwithstanding their efforts to dress up balance sheets, the biggest U.S. banks are more fragile than they've been at any time since 2007."

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

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