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Two analysts express deep concerns for U.S. economy |
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Tuesday, 01 May 2007 |
By JOHN NORTH
Two economists differed — but were both glum — in their forecasts for the U.S. economy during the 23rd annual Crystal Ball Seminar last Thursday night at UNC Asheville’s Reuter Center.
Around 200 people, including a number of area businesspeople, attended the program that included a reception featuring wine and cheese before the forecasts and a 30-minute question-and-answer session afterward. The event was co-sponsored by the UNCA economics department and RBC Centura.
Speaking first and slightly more optimistically, David W. Berson said
the domestic housing market has not yet reached its bottom, “but that
the biggest declines are behind us.” By the end of the year, the
declines in housing should end, “but I think we’ll have to wait till
2008 to see any kind of housing market recovery.” Thus, Berson said,
based on the data, he expects to see the economy continue to grow,
albeit only moderately, for the rest of this year.
| | David W. Berson |
On a bleaker note, the other speaker, James F. Smith, pointed out that
The Wall Street Journal last week published individual forecasts by a
number of economists and “out of 60 of us, one of us had a recession
(looming) — and that would be me.”
He added, “I’ll try to make (the case for) why I’m looking for
recession really clear.” Smith then noted that many indicators are
present that have been consistent before all previous U.S. recessions
— most notably an inversion of the treasury yield curve.
The yield curve first inverted last July and historical data show that
exactly nine months later a recession always occurs, “so May 16 at 9
a.m. — be alert!” Smith said, spicing his pessimistic view with a dash
of humor. “That’s when the recession will begin!”
What’s more, Smith said, “If we (somehow) avoid a recession this year,
we’ll have one in 2010.” However, he added wryly, “If we don’t fix
Medicare and Social Security, then we’re all bankrupt anyway!”
He also said he foresees the economy going higher for the second half
of next year than the consensus of the Journal’s 60 economists.
In summarizing his views, Smith noted that he is predicting a “short,
mild recession, like 2001,” beginning in mid-May, with a rebound in the
fourth quarter and a stronger 2008. But, “if there’s no flat tax or
something else, we’ll have a real doozy (of a recession) in 2010.”
Berson, vice president and chief economist at Fannie Mae, is
responsible for forecasting interest rates and the housing market. He
is a past president of the National Association of Business Economists
and has been named chief financial economist at Wharton Econometrics
Forecasting Associates and a visiting scholar with the Federal Reserve.
| | James F. Smith |
Smith, twice named the best economic forecaster by the Wall Street
Journal, is the chief economist at Parsec Financial. He has more than
25 years’ experience as an economics forecaster, and his career spans
private industry, government and academic institutions including
tenures with Wharton Econometrics, Union Carbide and the Federal
Reserve.
During his presentation, Berson said, “We think core inflation will be
brought down this year. We think interest rates will move within a
fairly narrow band. The only thing that could change things would be if
we fell into a recession. Then the Fed would ease up” on interest rates.
He noted that housing affordability in the U.S. has never been lower in
history. For instance, it was easier to buy a home in 1981 in
California at a 17.5 percent interest rate than it is now at a 6.25
percent rate —
“and it’s the key reason housing isn’t growing.”
Berson said that “double-digit (annual) increases in housing prices
cannot continue because eventually people can’t afford them ... You
want gains in housing that are in line with income growth.”
Meanwhile, Smith stressed the importance of the “political economic
cycle,” which recognizes that people vote their pocketbooks — “at least
the half who actually bother to vote.”
As for the state of the economy before an election, he said, “it makes
a huge difference on who gets elected
president of the United States.
If it’s 3.2 percent (growth) or more,” then the Republican candidate
will win by a significant margin. If that percentage is less, then a
Democrat will triumph,” Smith said, citing economic data.
During a question-and-answer session, a man asked where else cities and
counties, which depend on property taxes, could look to raise funds,
with the decline in real estate.
“There will be lots of cities and counties around the country that will
have to cut spending or increase (other) taxes,” Berson replied.
Another man said the two economists seemed to be focused just on the
U.S. economy and he wondered what they had to say about the rest of the
world.
“The problem is, U.S. consumers are importing like mad — about $1.8 trillion in goods per year,” Smith answered.
He also noted that, “if the U.S. goes into a recession, the rest of the
world’s going to hurt. The last five years were the best (ever) for
global growth.”
Further, Smith pointed out that the U.S. accounts for a third of the
world’s economic activity, while it comprises about 4.7 percent of the
world’s population.
Another man asked about the impact if the dollar were replaced by the Euro as the world’s standard currency.
“There certainly are advantages to us having the global currency,”
Berson said. “But what makes it the key currency — we’re the biggest
and safest economy with the most stable return.”
A man asked about the potential impact on the U.S. if China, with what
he said ranks as the world’s fourth-largest economy, suffered a
recession.
“It wouldn’t be very good,” Berson replied. “They do buy our goods and
services. But I don’t think it would have a huge impact, unless it drew
(all of) Asia down into a recession.”
In directing her remarks to Smith, a woman noted that two or three
years ago at the seminar, he predicted a Bush dynasty. “Would you care
to revisit that?”
“The Republicans can nominate anyone in this room,” Smith answered. “It
doesn’t matter. If my forecast is right, any Republican will win. If
Dave is right, any Democrat will win.”
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