Federal Reserve Chairman Ben Bernanke testified before Congress Wednesday that the U.S. economy is recovering, and he predicts the nation will not experience a double-dip recession.

Economist David Levy is far less optimistic — he sees a 60% chance of a another recession in 2011.

Levy, who is chairman of The Jerome Levy Forecasting Center, says the factors that caused profits to rebound at the end of 2009 and the beginning of 2010 will not be there to bolster the economy in the coming months.

U.S. consumers, particularly high net worth individuals, who were terrified of losing their money in 2009, started spending again from the holiday season last year into the first few months of 2010. Now, they’ve tensed up again, he says. As a result, the profits of retailers, particularly high-end stores, are falling, as detailed here.

“We are starting to see those numbers slip up, become a little below plan, as we’ve gotten about eight weeks from that strength,” Levy says. “That is going to fade more.”

(Update: Right on cue, Friday’s May retail sales figures were disappointing, falling 1.2%, and 1.1% ex-autos. Expectations were for a small rise in both categories, and the drop in the headline figure was the largest in 8 months.)

Levy says that investors, who are already wary of the stock market, are going to see a lot more that will make them nervous. He predicts that earnings will be very disappointing in the second half of 2010.

Deficit Spending a Huge Boost for Profits

According to Levy, the deficit spending that lifted the economy is tapering off, and the private sector cannot maintain the recovery on its own. In the accompanying clip, he tells Aaron Task that the stimulus money was integral to the economy’s recovery.

“The federal deficit was the dominant force pulling us out” of recession, Levy says.
“When the government spends huge amounts of money — directly or indirectly — it becomes huge business revenue without [companies] having to pay the people to give them that income. It’s a huge, huge boost to profits.”

Because the economy is so dependent on the support of the federal government, Levy recommends that the deficit spending continue, but not necessarily in the manner it’s been spent to date

“What we should do is more long-term federal investments, infrastructure repair, education, rebuild military hardware,” Levy says. “If we are going to run a deficit that is creating debt, we should be putting on assets at the same time.”

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