Fed sees more growth? Don't count on it. Recession ahead.

Is the United States on the brink of a recession? To judge by the Federal Reserve, which boosted its economic growth forecast Wednesday, the answer is no. Pointing to the 25 percent rise in the S&P 500 index from its October 2011 low, bullish investors cry, “No!”

But consumers, not investors, set the tone for the economy. On the consumer side, the risks are tilted toward the downside.

The US economy has been fueled in recent months by strong consumer spending, which increased in February by 0.8 percent, its best showing in seven months, and 0.4 percent in January. Retail sales rose 1.1 percent in February – the fastest pace in five months – while same-store sales advanced 4.7 percent. These numbers correlate with recent gains in consumer confidence and sentiment.

Unfortunately, that pace doesn't look sustainable. Personal income growth continues to be weak – up just 0.2 percent in February – meaning this recent exuberant consumer spending is being fueled largely by increased debt and further dipping into savings. Real household after-tax incomes declined in February for a second straight month and have gained a mere 0.3 percent year over year. Consumers still face high personal debt levels.

Housing activity remains depressed, with the only life coming from the multifamily component, which is being driven by the zeal for rental apartments as homeownership falls. Homeowners are losing their abodes to foreclosures; many can’t meet stringent mortgage lending standards; some worry about homeownership responsibilities in the face of job uncertainty; and many people have no desire to buy an asset that continues to fall in price. I am looking for a further 20 percent slide in housing prices.

Employment has gained in recent months because American business has, at least temporarily, run out of productivity enhancement, which earlier allowed it to cover output gains with reduced staff. Payroll employment growth has risen in recent months, although the unseasonably warm winter may have temporarily boosted jobs. Furthermore, employment growth has been from an extremely low recessionary base and the unemployment, while down from 9.1 percent last August, is still high at 8.2 percent.

A very disappointing jobs report showed that just 120,000 nonfarm jobs were created in March versus an expected gain of about 205,000. Sure, the unemployment rate ticked down to 8.2 percent, but only because the number of unemployed fell as people dropped out of the labor force. In response, stocks plunged here and abroad as worries were revived about the true strength of an already-feeble economic recovery from the Great Recession.

Are there any positive signs of growth?  Gross domestic product has been accelerating in recent quarters, but not after inventory investment is removed to yield final sales. In the fourth quarter of 2011, inventory growth accounted for 60 percent of the rise in GDP, and that accumulation may not have been desired, suggesting future production cutbacks. Industrial production growth is already sliding. The liquidation of excess inventories accounts for a major share of the decline in economic activity in recessions. Recall that late last year, retailers, worried about being stuck with unsold Christmas goods as in 2010, held early sales, even opening on Thanksgiving Day.

Consumer spending is the only major source of strength in the American economy this year. On the other side of the scale several weaknesses are piled up: State and local government spending remains depressed by deficit woes and underfunded pension plans; excess capacity restrains capital spending; and recent inventory-building appears involuntary.

So it should not come as a surprise if a consumer retrenchment tips the balance toward a moderate – and overdue – recession.

– A. Gary Shilling heads an economic consulting firm in Springfield, N.J. His latest book is "The Age of Deleveraging."