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Tuesday, 01 May 2007 18:34 |
By JOHN NORTH
Two economists differed ó but were both glum ó in their forecasts for the U.S. economy during the 23rd annual Crystal Ball Seminar last Thursday night at UNC Ashevilleís 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, ìbut that
the biggest declines are behind us.î By the end of the year, the
declines in housing should end, ìbut I think weíll have to wait till
2008 to see any kind of housing market recovery.î 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 ìout of 60 of us, one of us had a recession
(looming) ó and that would be me.î
He added, ìIíll try to make (the case for) why Iím looking for
recession really clear.î Smith then noted that many indicators are
present that have been consistent before all previous U.S. recessions
ó 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, ìso May 16 at 9
a.m. ó be alert!î Smith said, spicing his pessimistic view with a dash
of humor. ìThatís when the recession will begin!î
Whatís more, Smith said, ìIf we (somehow) avoid a recession this year,
weíll have one in 2010.î However, he added wryly, ìIf we donít fix
Medicare and Social Security, then weíre all bankrupt anyway!î
He also said he foresees the economy going higher for the second half
of next year than the consensus of the Journalís 60 economists.
In summarizing his views, Smith noted that he is predicting a ìshort,
mild recession, like 2001,î beginning in mid-May, with a rebound in the
fourth quarter and a stronger 2008. But, ìif thereís no flat tax or
something else, weíll have a real doozy (of a recession) in 2010.î
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 yearsí 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, ìWe 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 upî 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 ó
ìand itís the key reason housing isnít growing.î
Berson said that ìdouble-digit (annual) increases in housing prices
cannot continue because eventually people canít afford them ... You
want gains in housing that are in line with income growth.î
Meanwhile, Smith stressed the importance of the ìpolitical economic
cycle,î which recognizes that people vote their pocketbooks ó ìat least
the half who actually bother to vote.î
As for the state of the economy before an election, he said, ìit makes
a huge difference on who gets elected
president of the United States.
If itís 3.2 percent (growth) or more,î then the Republican candidate
will win by a significant margin. If that percentage is less, then a
Democrat will triumph,î 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.
ìThere will be lots of cities and counties around the country that will
have to cut spending or increase (other) taxes,î 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.
ìThe problem is, U.S. consumers are importing like mad ó about $1.8 trillion in goods per year,î Smith answered.
He also noted that, ìif the U.S. goes into a recession, the rest of the
worldís going to hurt. The last five years were the best (ever) for
global growth.î
Further, Smith pointed out that the U.S. accounts for a third of the
worldís economic activity, while it comprises about 4.7 percent of the
worldís population.
Another man asked about the impact if the dollar were replaced by the Euro as the worldís standard currency.
ìThere certainly are advantages to us having the global currency,î
Berson said. ìBut what makes it the key currency ó weíre the biggest
and safest economy with the most stable return.î
A man asked about the potential impact on the U.S. if China, with what
he said ranks as the worldís fourth-largest economy, suffered a
recession.
ìIt wouldnít be very good,î Berson replied. ìThey do buy our goods and
services. But I donít think it would have a huge impact, unless it drew
(all of) Asia down into a recession.î
In directing her remarks to Smith, a woman noted that two or three
years ago at the seminar, he predicted a Bush dynasty. ìWould you care
to revisit that?î
ìThe Republicans can nominate anyone in this room,î Smith answered. ìIt
doesnít matter. If my forecast is right, any Republican will win. If
Dave is right, any Democrat will win.î
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