Fed sees more growth? Don't count on it. Recession ahead.

Despite the Federal Reserve's brighter outlook for the economy, consumers won't spend enough to keep the US from sliding into a moderate recession this year.

Jason Reed/Reuters
US Federal Reserve Chairman Ben Bernanke speaks at a news conference April 25, 2012, following the monthly two-day meeting at the Federal Reserve in Washington. Although the Fed offered a modestly brighter assessment of the economy's prospects, consumer spending is likely to falter, pushing the US into a recession.

Is the United States on the brink of a recession? To judge by the Federal Reserve, which boosted its economic growth forecast Wednesday, the answer is no. Pointing to the 25 percent rise in the S&P 500 index from its October 2011 low, bullish investors cry, “No!”

But consumers, not investors, set the tone for the economy. On the consumer side, the risks are tilted toward the downside.

The US economy has been fueled in recent months by strong consumer spending, which increased in February by 0.8 percent, its best showing in seven months, and 0.4 percent in January. Retail sales rose 1.1 percent in February – the fastest pace in five months – while same-store sales advanced 4.7 percent. These numbers correlate with recent gains in consumer confidence and sentiment.

Unfortunately, that pace doesn't look sustainable. 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. Real household after-tax incomes declined in February for a second straight month and have gained a mere 0.3 percent year over year. Consumers still face high personal debt levels.

Housing activity remains depressed, with the only life coming from the multifamily component, which is being driven by the zeal for rental apartments as homeownership falls. Homeowners are losing their abodes to foreclosures; many can’t meet stringent mortgage lending standards; some worry about homeownership responsibilities in the face of job uncertainty; and many people have no desire to buy an asset that continues to fall in price. I am looking for a further 20 percent slide in housing prices.

Employment has gained in recent months because American business has, at least temporarily, run out of productivity enhancement, which earlier allowed it to cover output gains with reduced staff. Payroll employment growth has risen in recent months, although the unseasonably warm winter may have temporarily boosted jobs. Furthermore, employment growth has been from an extremely low recessionary base and the unemployment, while down from 9.1 percent last August, is still high at 8.2 percent.

A very disappointing jobs report showed that just 120,000 nonfarm jobs were created in March versus an expected gain of about 205,000. Sure, the unemployment rate ticked down to 8.2 percent, but only because the number of unemployed fell as people dropped out of the labor force. In response, stocks plunged here and abroad as worries were revived about the true strength of an already-feeble economic recovery from the Great Recession.

Are there any positive signs of growth?  Gross domestic product has been accelerating in recent quarters, but not after inventory investment is removed to yield final sales. In the fourth quarter of 2011, inventory growth accounted for 60 percent of the rise in GDP, and that accumulation may not have been desired, suggesting future production cutbacks. Industrial production growth is already sliding. The liquidation of excess inventories accounts for a major share of the decline in economic activity in recessions. Recall that late last year, retailers, worried about being stuck with unsold Christmas goods as in 2010, held early sales, even opening on Thanksgiving Day.

Consumer spending is the only major source of strength in the American economy this year. On the other side of the scale several weaknesses are piled up: State and local government spending remains depressed by deficit woes and underfunded pension plans; excess capacity restrains capital spending; and recent inventory-building appears involuntary.

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

– A. Gary Shilling heads an economic consulting firm in Springfield, N.J. His latest book is "The Age of Deleveraging." 

You've read  of  free articles. Subscribe to continue.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.