Fed Surveys: Economy in Worse Shape Than Feared, Recession Odds Spike to 50%

Monday, 14 Nov 2011 02:24 PM

By Forrest Jones

The economy is in worse shape now than feared and the outlook for the next two years looks bleak, with the probability of a recession spiking in early 2012, Federal Reserve studies show.

Economists surveyed by the Federal Reserve Bank of Philadelphia lowered their U.S. economic growth outlook for the next two years while hiking up their forecasts for unemployment rates, the bank reports.

The survey of 45 economic forecasts expect real gross domestic product (GDP) to grow at an annual rate of 2.6 percent this quarter, unchanged from a previous estimate.

It's all downhill from there for at least for another year.

The forecasters predict real GDP will grow 2.4 percent in 2012, down from a previous forecast of 2.6 percent, while growth for 2013 will come in at 2.7 percent, down from 2.9 percent once estimated.

(Getty Images photo)

Forget about unemployment rates ever returning to pre-recession levels typical of the early 2000s, as conditions today are about as good as it gets for years to come.

The unemployment rate expected to average 8.8 percent next year, up from an earlier forecast of 8.6 percent, the survey finds.

Unemployment rates for 2013 are forecast to come in at 8.4 percent, up from 8.1 percent.

"The outlook for growth and unemployment in the U.S. economy looks a little weaker now than it did three months ago," the Federal Reserve Bank of Philadelphia said in a statement.

Roll of the dice

A separate Federal Reserve study shows the European debt crisis is pushing the U.S. economy even closer to the brink of recession.

Economic contraction could come by early 2012, or just a few months away, according to research from the Federal Reserve Bank of San Francisco.

U.S. economic indicators are weak, and a default by any eurozone countries could send the chance of a recession striking early next year spiking, researchers at the regional Fed bank write, hitting a 50-50 chance during the first six months of the year.

"A European sovereign debt default may well sink the United States back into recession," Fed researchers write in a report.

"However, if we navigate the storm through the second half of 2012, it appears that danger will recede rapidly in 2013."

Stall speed

Experts point out that if the U.S. economy doesn't grow with any more speed, it runs the risk of hitting stall speed.

Like an airplane, an economy moving too slowly will fail to generate enough lift and will stall out and crash.

The U.S. economy is facing five potholes on its path to more sustained growth: Housing, unemployment, public finances, infrastructure and weak credit markets, one expert contends.

"Until we get movement on those five things, we're at stall speed," says Mohamed El-Erian, CEO of Pimco, the world's largest bond fund.

Stall speed is particularly scary when talking about the economy as large as that of the U.S.

"We can talk about the probability of recession when unemployment is already too high, when the financial deficit is 9 percent of (gross domestic product), when interest rates are already at zero percent and when a quarter of the homeowners are already underwater on their mortgages. That is a terrifying concept. That is why everything must be done to avoid a slowdown in growth," El-Erian tells CNBC.

Other analysts agree that the country shouldn't breathe a sigh of relief when hearing growth forecasts in positive territory.

Weak economic indicators show it doesn't take much to push the economy right back into the depths of recession for a long time.

"While the likelihood of a recession [in the U.S.] has eased of late, the economy is still operating at only a modest pace and remains vulnerable to shocks," says Julia Coronado, chief North American economists at BNP Paribas, according to the Wall Street Journal.

Source: http://www.moneynews.com/StreetTalk/Fed-Economy-Recession/2011/11/14/id/417981

We Are All Socialists Now

In many ways our economy already resembles a European one. As boomers age and spending grows, we will become even more French.

By Jon Meacham and Evan Thomas NEWSWEEK
Published Feb 7, 2009
From the magazine issue dated Feb 16, 2009

The interview was nearly over. on the Fox News Channel last Wednesday evening, Sean Hannity was coming to the end of a segment with Indiana Congressman Mike Pence, the chair of the House Republican Conference and a vociferous foe of President Obama's nearly $1 trillion stimulus bill. How, Pence had asked rhetorically, was $50 million for the National Endowment for the Arts going to put people back to work in Indiana? How would $20 million for "fish passage barriers" (a provision to pay for the removal of barriers in rivers and streams so that fish could migrate freely) help create jobs? Hannity could not have agreed more. "It is … the European Socialist Act of 2009," the host said, signing off. "We're counting on you to stop it. Thank you, congressman."

There it was, just before the commercial: the S word, a favorite among conservatives since John McCain began using it during the presidential campaign. (Remember Joe the Plumber? Sadly, so do we.) But it seems strangely beside the point. The U.S. government has already—under a conservative Republican administration—effectively nationalized the banking and mortgage industries. That seems a stronger sign of socialism than $50 million for art. Whether we want to admit it or not—and many, especially Congressman Pence and Hannity, do not—the America of 2009 is moving toward a modern European state.

We remain a center-right nation in many ways—particularly culturally, and our instinct, once the crisis passes, will be to try to revert to a more free-market style of capitalism—but it was, again, under a conservative GOP administration that we enacted the largest expansion of the welfare state in 30 years: prescription drugs for the elderly. People on the right and the left want government to invest in alternative energies in order to break our addiction to foreign oil. And it is unlikely that even the reddest of states will decline federal money for infrastructural improvements.

If we fail to acknowledge the reality of the growing role of government in the economy, insisting instead on fighting 21st-century wars with 20th-century terms and tactics, then we are doomed to a fractious and unedifying debate. The sooner we understand where we truly stand, the sooner we can think more clearly about how to use government in today's world.

As the Obama administration presses the largest fiscal bill in American history, caps the salaries of executives at institutions receiving federal aid at $500,000 and introduces a new plan to rescue the banking industry, the unemployment rate is at its highest in 16 years. The Dow has slumped to 1998 levels, and last year mortgage foreclosures rose 81 percent.

All of this is unfolding in an economy that can no longer be understood, even in passing, as the Great Society vs. the Gipper. Whether we like it or not—or even whether many people have thought much about it or not—the numbers clearly suggest that we are headed in a more European direction. A decade ago U.S. government spending was 34.3 percent of GDP, compared with 48.2 percent in the euro zone—a roughly 14-point gap, according to the Organization for Economic Cooperation and Development. In 2010 U.S. spending is expected to be 39.9 percent of GDP, compared with 47.1 percent in the euro zone—a gap of less than 8 points. As entitlement spending rises over the next decade, we will become even more French.


Source: http://www.newsweek.com/id/183663


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