It very definitely is in a gray area right now. US copyright law is so screwed up that even the courts can’t agree on its interpretation. (Sorry, I don’t have time to do research on citations now, but a general search and read on ‘copyright’ should demonstrate.) Some courts throw out criminal and civil copyright violation lawsuits that other jurisdictions see fit to prosecute diligently. And there seems to be no huge difference, other than the jurisdiction and judge involved.
This is not a legal opinion; I’m not an attorney.
In the past, it has been common practice for ‘fair use’ to include such things as personal copies of freely available recordings, such as “off the radio”, for example, which a lot of us did as teenagers, decades ago. Radio stations would announce a time, for example, when they would play an entire LP recording with no commercial interruption, specifically for users to tape and save—and that was okay with the legal system, even though record producers didn’t much care for it. What the producers failed to realize was that practices such as this gave their labels / artists more exposure and drove up sales, rather than cutting deeply into them, as they feared.
Fast forward to file-sharing on the Web. It used to be that only the big uploaders of copyrighted material to the Web were ever prosecuted. You’d see headline prosecutions of people who posted thousands of copyright-protected works to the Web (for no real return), but never the downloaders of those files. That has started to change, and some downloaders are now being prosecuted under violation of copyright laws. (I’m not sure that these cases have run to conclusion yet.)
I believe (my own, unprofessional opinion) that if works are available on such public sites as Pandora.com, Grooveshark.com, Last.fm, and other such venues, and you can record them from those public sites, you probably won’t be prosecuted in the first place, and can make the ethical case that what you’re doing constitutes ‘fair use’ ... especially if it helps you decide to buy more of an artist’s work, which it certainly does in my case.