The U.S. still faces the risk of recession because of potential cuts in government spending on top of anemic job and wage growth, according to Komal Sri-Kumar, founder of Sri-Kumar Global Strategies Inc.
The 0.1 percent decline in fourth-quarter gross domestic product was “not the beginning of the double dip that I have been worried about, but I think that is still in the cards,” Sri-Kumar said in a radio interview on “Bloomberg Surveillance” with Tom Keene.
Automatic spending cuts stemming from a 2011 budget agreement scheduled to take effect March 1 are threatening to slow growth even as legislation funding government operations expires on March 27. The cuts, known as sequestration, were first included in an August 2011 deficit-reduction deal designed to be so draconian that it would push Democrats and Republicans to compromise on taxes and spending.
Employment growth has been slow as the U.S. labor market added 157,000 jobs in January, according to a Feb. 1 report. The unemployment rate climbed to 7.9 percent. Joblessness has hovered at 7.8 percent or 7.9 percent for five consecutive months. January’s increase was less than the advance of 165,000 that was the median forecast of economists surveyed by Bloomberg.
“The question is, why is he increase in wages and employment still relatively anemic is compared with history?” Sri-Kumar said “We are in a recovery, but it is very slight. And that is why it can be easily dislodged.”
The Commerce Department said last week that the U.S. economy unexpectedly shrank in the fourth quarter and the Federal Reserve reiterated its commitment to asset purchases to push down yields and lift growth.
Stocks are disjointed from the reality in the underlying economy, which is negative for markets in the long run, Sri Kumar said. The Standard & Poor’s 500 Index returned 5.2 percent last month, its best start to a year since 1997.
The Fed has injected more than $2.3 trillion into the financial system through bond purchases to ignite economic growth and keep borrowing costs near record lows. It’s buying $85 billion a month in mortgage securities and Treasuries.
“The stock market is going up because you have the Federal Reserve, which you do not want to fight,” Sri-Kumar said. “At some point in time, the Federal Reserve has to pull back and take in the liquidity it created.”
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