Gary Shilling

Last week’s four-part series laying out the reasons for my prediction of a U.S. recession in 2012 elicited a variety of questions and comments from readers that merit a response.

I have explained why I believe there may be a U.S. recession this year, spurred by renewed consumer retrenchment amid further declines in house prices, stagnant incomes and uncertain job prospects. So why are investors continuing to show such an appetite for equities?

In the first two installments, I laid out the reasons why the U.S. economy, despite current strong consumer spending and the recent euphoria of investors over stocks, will weaken into a recession as the year progresses, led by renewed consumer retrenchment.

Employment in the U.S. has gained in recent months because businesses have, at least temporarily, run out of productivity enhancements that had allowed them to cover output gains with reduced staff.

For several months, I’ve been forecasting a recession in the U.S. this year, arguing that weakened consumer spending -- the key to the economic outlook -- would tip the economy back into a downturn.

The Federal Reserve has released the results of stress tests of 19 big U.S. banks that assessed how their Tier 1 common capital ratios would fare by the end of 2013 with a 13 percent unemployment rate, a 50 percent decline in stock prices and house prices off 21 percent.

Think of all the recent federal programs to keep people who can’t afford them in their four- bedroom houses.

In making my case for continued housing weakness, I’ve emphasized the negative effect of excess inventories on house sales, prices, new construction and just about every other aspect of residential real estate.

The collapse in housing and the 33 percent plunge in house prices since 2006 are favoring renting over homeownership. This trend will dominate the housing market for the next four or five years, and put additional pressure on a weak economy.