Federal Reservations

Over the last five months the strength of the United States economy has surprised on the up-side. America posted its strongest quarterly economic growth since the end of 2006 and U.S. corporate profits hit an all-time record high. But with the end of 100% “bonus depreciation, government spending shrinking for the first time since the 1940s and rising tax rates”; I project America is falling into a recession that will drive up unemployment to a new highs during the 2012 election.

Although the U.S. economy officially emerged from recession twenty-six months ago, most Americans report that they believe there has been little or no growth and 75% believe the nation is headed down the economic wrong track. The “Great Recession” of 2007 to 2009 was the longest since the Great Depression and was the first time U.S Gross Domestic Product actually fell in any year since 1948. Unemployment according to the Labor Department peaked in October 2009 at 10.1% and then declined to 9% last month. But this statistic does not include those unemployed who have been out of work for so long they no longer “participate” in registering for unemployment benefits. As shown below; labor force “participation” shrank by 2% since 2009. Add in these jobless and real unemployment rate is at a record 11% right now:

The stimulus that has recently been driving GDP growth is a provision contained in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This tax incentive allows businesses to book 100 percent “bonus depreciation” for any qualified capital expenditures purchased and taken delivery by December 31, 2011. This explains why the industrial production index has jumped back up to its average level for the last 40 years. The good news is businesses substantially increased capital investments in everything from $25,000 new Ford cars to $335 million Boeing 747 airplanes. The bad news is that business investments are being pulled forward into 2011 and 2012 suffer an off-setting fall in demand. Next year the U.S. economy will surprise on the down-side and unemployment will be on the upswing.

To fund spending increases on salary and pension benefits during the Great Recession; state and local governments raised taxes so much the effective percentage of all taxes paid by the average household in America jumped from 17.5% to 17.9%. This $247 billion tax increase more than off-set the stimulus effects of the last year’s federal payroll tax cut stimulus; but was not enough to prevent the lay-off of over 900,000 workers. But with voters in revolt and tax collection falling; state and local governments will cut spending this year for the first time since 1944.

Federal spending increased by 17% and the national debt ballooned by 55% since 2008. But voter rejection of deficit spending in 2010 and this year’s credit downgrade of the United States have forced Congress to cut federal spending for the first time since 1948. The recent deficit- reduction budget passed by Congress and signed by the President requires Congress to negotiate $1.5 billion of cuts, or the sequestration will require $1.2 trillion of cuts over the next 10 years. Federal Reserve Chairman Ben Bernanke stated in his last press conference: “I’m dissatisfied with the economy – unemployment is far too high”. He went on to state that “unemployment will remain above 7.8% through December 2013”. This is coded Fed speak for – watch out!

The last time on Election Day that America had declining government spending and rising taxes was 1948. That economy was growing by 2.6% and unemployment was only 3.8%. Twelve months later; growth had ground to a halt and unemployment more than doubled to 7.9%. I forecast America will soon be in recession and unemployment will rise into the 2012 election.

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Originally from Big Government

(Reuters) - The European debt crisis is raising the odds of a U.S. recession, with economic contraction more likely than not by early 2012, according to research from the San Francisco Federal Reserve Bank.

Originally from Reuters: Business News

(Reuters) - The European debt crisis is raising the odds of a U.S. recession, with economic contraction more likely than not by early 2012, according to research from the San Francisco Federal Reserve Bank.

Originally from Reuters: Business News

(Reuters) - The European debt crisis is raising the odds of a U.S. recession, with economic contraction more likely than not by early 2012, according to research from the San Francisco Federal Reserve Bank.

Originally from Reuters: Business News

Yesterday I commented that I thought Europe was probably already in a recession. Since then I have received a number of questions about this comment, especially asking about a recession in the U.S.

First, I do not follow Europe nearly as closely as the U.S., and I was just reacting to the European Commission report that the “recovery in Europe has come to a standstill”. My recession comment was just a guess based on stories out of Europe, and my level of confidence is not very high. So take my comment for what it is worth - very little!

Second, my best guess is the U.S. stays out of recession even if Europe is currently in a recession. Of course there are significant downside risks, especially if there is a disorderly end to the euro.

If we look at the channels of contagion, it seems the impact from Europe – barring a blow-up – will be fairly small. Of course, with sluggish growth, the U.S. is very susceptible to economic shocks, and it also appears that the U.S. is moving to more austerity in 2012 – and that is an additional concern (If Congress does nothing, taxes will increase on working Americans, and more).

What are the channels of contagion from Europe? First, the trade channel – the impact on U.S. exports – is pretty small. Although Europe is a major trading partner, exports only make up a small portion of U.S. GDP. Some of the impact from trade would probably be offset by lower oil prices – and of course lower interest rates as investors seek safety (the European crisis is a key reason the U.S. 10 year bond yield is around 2%).

A more significant channel would be tightening of U.S. credit conditions in response to the European crisis. That is why I looked so closely at the Fed’s October Senior Loan Officer Opinion Survey on Bank Lending Practices that was released on Monday. The survey showed “considerable” tightening on lending to European banks, and some tightening to European firms, but the survey showed no tightening in the U.S. (although lending standards are already pretty tight).

Another possible channel of contagion is less European lending to emerging markets and a slowdown in those economies – and then fewer exports from the U.S. to those emerging markets. This is possible, but we haven’t seen any evidence of this yet. And if emerging markets slowed sharply we’d probably see an offsetting sharp decline in oil prices (hasn't happened).

So, right now, I’m sticking with my general forecast for sluggish GDP and employment growth in the U.S.

Originally from Calculated Risk

CHATTANOOGA, Tennessee (Reuters) The U.S. economy is unlikely to slip back into recession, and an improvement in recent indicators has been encouraging, Atlanta Federal Reserve Bank President Dennis Lockhart said on Tuesday.

Originally from Reuters: Business News

David Zeiler writes: The U.S. economy is "tipping into a new recession" and there's nothing President Barack Obama or the U.S. Federal Reserve can do to prevent it, according to Lakshman Achuthan, co-founder of the Economic Cycle Research Institute (ECRI). Now, if you're wondering why you should believe this prediction ahead of others then there's something you should know: According to The Economist, Achuthan's predictions on the direction of economy - either toward recession or recovery - have never been wrong.

Originally from The Market Oracle

We at EconMatters expected the QE2 froth to come out of markets once the fed experiment of artificially inflating asset prices was over, and for the most part this is exactly where we are today at the crossroads. Are we going to just trudge along with a slow growth economy until the world finally works its way out of the housing inventory overhang, and the next building phase takes hold and there is a strong surge in the labor markets from the bottom up, or are we going to take the next leg down and head back into a recessionary environment?

Originally from The Market Oracle

Increased talk of a double dip for the world’s biggest economy triggered a precipitous decline on Wall Street Thursday. However, Jim Paulsen of Capital Management says fears of a recession are overblown and that the Federal Reserve may have been over-bearish in its assessment of the U.S. economy.

Originally from All News, Video and Posts related to TOPIC: Federal Reserve

NEW YORK (Reuters) - World stocks fell to 13-month lows and commodities tumbled on Thursday as weak data from China crystallized investor fears of a global recession one day after a grim economic outlook from the Federal Reserve.

Originally from Reuters: Business News