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With the notable exception of housing, the U.S. economy has been on a fairly strong uptrend in recent months.
But this is "as good as it's going to get," says Srinivas Thiruvadanthai, director of research at the Jerome Levy Forecasting Center, predicting the economy will cool considerably this spring. The U.S. "is in all probability headed for a marked slowdown."
Thiruvadanthai's downbeat, but not dire, view is based primarily on a belief that an unseasonably warm winter, along with the Fed's uber-easy policy, has artificially inflated the economy by giving a boost to construction.
On Tuesday, the January durable goods report was markedly weaker than expected, which supports Thiruvadanthai's thesis. Still, he concedes the data series is famously "noisy" and likely hit in January by the expiration of the 100% depreciation expense tax benefit.
For the rest of 2012, Jerome Levy's official forecast is a 35% chance of recession if Europe merely muddles along and a 75% chance if Europe's recession becomes more severe or there's major upheaval in the financial system.
The ECB's lending facilities prevented another banking crisis, which lessens the risk of a U.S. recession, Thiruvadanthai says, suggesting this is the big reason stocks have rallied so sharply since September. On Tuesday, the ECB announced it would supply another round of lending to 800 European banks, allocating $712 billion in three-year loans to support liquidity in the markets.
However, Europe's economy is now contracting and the risk of a financial sector crisis remains. Furthermore, he notes the rest of the global economy isn't going gangbusters, which will hurt America's exports, one bright spot in the recovery.
How this all plays out remains to be seen and everybody's got an opinion, one way or another. The econo-bulls will tell you the U.S. economy has momentum, which is going to build over the course of 2012 -- aided of course by the Fed's zero interest rate policy. The bears, naturally, will say the recovery is a mirage and Armageddon is around the corner; to be clear, Thiruvadanthai's outlook is not nearly so grim.
Personally, I'm reminded of what RBS's Michelle Girard recently told me about the outlook for 2012: The economy is not going to be as good as it seems when the data are strong, as has been the case lately, and not as bad as it seems when the data are weaker-than-expected -- which is what's coming next if Thiruvadanthai is right.
Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com
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