Despite the declining unemployment, the United States will fall into a recession in the second half of 2012 due to fiscal tightening, one economist predicts.
Jim Walker, founder and manager of Asianomics, believes reductions in government spending will slash GDP between 1 percent and 1.5 percent, according to CNBC.
"There's going to be a significant slowdown in fiscal expenditure in the U.S.," Walker told CNBC. "They're going to have to control the fiscal side much more as the year goes on."
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Corporate investment will also probably fall because the federal depreciation allowance expired at the end of 2011. Walker sees a 55 percent chance of a recession in the United States.
Plus, American consumers will see another "period of reckoning" even though consumer confidence and spending has improved, he writes in a report sent to clients.
He points out, according to CNBC, that home prices continue to fall, equity prices are still off their highs of the year, outstanding household credit continues to shrink, real worker compensation remains negative, and employment growth is slow.
In addition, up until November consumer confidence was quickly reaching the recession lows of 2008.
Europe, which will see a recession with GDP contracting 2 percent to 5 percent this year, is in even worse shape, he says. Allen, CNBC reports, advises shorting the euro and avoiding commodities like copper that will decline in value because of a global downturn.
Jeff Applegate, chief investment officer at Morgan Stanley, is no raging bull either. “Europe and the United States will slip into recession this year,” he recently told The New York Times.
Although the U.S. economy is improving, it remains vulnerable to shocks, says Federal Reserve Chairman Ben Bernanke.
"The pace of the recovery has been frustratingly slow, particularly from the perspective of the millions of workers who remain unemployed or underemployed," Bernanke said today in testimony to the House Budget Committee in Washington, according to Bloomberg. "Moreover, the sluggish expansion has left the economy vulnerable to shocks."
Indicators of spending, production, and job-market activity have shown signs of improvement," Bernanke said. "The outlook remains uncertain, however, and close monitoring of economic developments will remain necessary."
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