By Steven K. Beckner

SANTA BARBARA, California (MNI) – There are some major
uncertainties facing the U.S. economy that could bode ill for growth and
jobs, the top advisor to Atlanta Federal Reserve Bank President Dennis
Lockhart warned Thursday.

David Altig, director of research for the Atlanta Fed, questioned
whether consumer spending momentum can be maintained and warned of an
overhang of unsold homes, low labor force participation, ongoing
financial difficulties in Europe and the coming U.S. “fiscal cliff.”

Altig, who attends Federal Open Market Committee meetings with FOMC
voter Lockhart, was talking about the national economic outlook at a
conference sponsored by the University of California-Santa Barbara ahead
of a panel of three Fed presidents — Lockhart plus San Francisco’s John
Williams and Philadelphia’s Charles Plosser.

He did not come to any conclusions about what monetary policy
should do but suggested that the great unknowns of which he spoke would
have a large bearing on the direction of policy. Lockhart has expressed
reticence about additional monetary stimulus but has not forsworn that
possibility.

Altig began by saying that consumer spending “has held up much
better than I expected” and “has been a solid backbone to spending
growth in the economy.”

But he questioned whether consumer spending can continue to grow at
its recent pace and warned, “if the consumer completely goes south, some
other spender has to step up and take its place.”

He suggested that consumer spending is bound to weaken, noting that
the personal savings rate has fallen to a low point for the recovery in
March of 3.8%. He said “that trend can’t continue.”

Altig also noted that housing is still fairly depressed, despite
some improvements, and yet there is a “large shadow inventory” of unsold
homes — distressed and other foreclosed properties that will come back
onto the market at some point.

When that happens, home prices “are going to head south,” he said.

Altig posed some key questions for policymakers:

“Will income pick up to support spending? Will housing stabilize
enough to not be as big a part of the picture? What’s next for the
Euro?”

Regarding Europe, he said that everytime the situation there “looks
like it’s getting better, something happens and it gets worse.”

At the very least, the European debt crisis is causing a slowdown
in one of the world’s largest trading blocs and creating an additional
drag on the U.S. economy.

Referring to a series of scheduled tax hikes due to take effect in
January 2013 unless existing law is changed, Altig said that “failure to
deal with the so-called fiscal issues” will mean that GDP growth will
fall under 1%, according to the Congressional Budget Office. In that
case, “there are all sorts of additional problems that arise.”

“That doesn’t include all sorts of adjustments you might want to
make for the heightened risk we saw last summer when the debt ceiling
hit big time,” he added.

Turning to the labor markets, Altig echoed Fed Chairman Ben
Bernanke and others in wondering whether 200,000-plus monthly job gains
can be sustained without faster GDP growth. And he reminded the audience
that last year, those kinds of job gains “faded.”

What’s more, “labor force participation has really fallen a lot,”
Altig said. “That means it gets awfully hard to figure out what the
unemployment rate means.”

To get back to 7.5% unemployment, he said that if labor force
participation is 63.8%, a 148,000 monthly gain in non-farm payrolls
would be required. At 65% he said 270,000 would be required. At 66.2% he
said it would take 391,000.

** MNI **

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