The Scary Actual U.S. Government Debt

Economy Is Running Out Of Gas
Recession Lurking With Demand Still Weak

By Rex Nutting, Marketwatch | 3 November 2010

WASHINGTON (MarketWatch)— The U.S. economy is in danger of sliding back into another recession, even before we're fully recovered from the last one. There's nothing surprising about the economic outlook. We know from reading our history that it takes a long time to recover from credit bubbles, but we've become impatient, expecting trends that evolved over decades to reverse themselves quickly. We want the economy to fix itself, right now!

But it won't. The economy is slowly readjusting and rebalancing, but in the meantime it's also suffering from a lack of demand to keep everyone employed. The federal government has taken on a lot of debt, but it's mostly offset deleveraging in the rest of the economy.

Our political system tried some half measures to keep demand up, but has apparently given up on even those. The economy is running out of gas, and there's no fueling station in sight. Consumers are still hunkered down, and without further growth in consumer spending, businesses won't have the profits they need to justify expanding their companies. Housing is still dead. Exports are benefiting from a weaker dollar (DXY), but foreign markets aren't expanding as fast as they once were.

Forever Blowing Bubbles

The Fed has been inflating asset prices as part of policy since at least the mid-1990s. The 'wealth effect' is the primary indicated mechanism: make people 'richer' and they'll spend more. So QE is there primarily to goose asset markets. But this'll end badly. And the next time the Fed won't have any silver bullets left to kill recession.

And you can forget about any increased demand from the government. Add it all up and you have to wonder: where is the growth going to come from? Despite this gloomy assessment, few economists are predicting an outright recession, just very slow growth.

Levy Forecasts Recession

One exception is David Levy, chairman of the Jerome Levy Forecasting Center, who looks at the economy from the unusual perspective of profits, not gross domestic product. Levy says he sees "domestic profits eroding, corporate earnings becoming increasingly disappointing, and a 60% chance of a recession in 2011". Read more about the Levy Forecast.

Broadly speaking, a 'recession' is a period of contraction in economic activity, usually associated with job losses, reduced output and reduced sales. By that definition, the economy began to recover from the recession in July 2009. Since then, GDP has grown about 3.5%, but employment is still down about 400,000.

Levy doesn't use the typical economic models, which might be why he was one of the few who accurately predicted the housing bubble and the 2008 recession. Instead, he focuses on flows of funds through the economy, especially the flows that lead to profits, which play a central role in business cycles.