From Daily Planet Staff Reports

The recession should be over by the end of this year and U.S. economy will show signs of recovery in 2010, economists David W. Berson and James F. Smith predicted during the 25th annual Crystal Ball Seminar in UNC Asheville’s Lipinsky Auditorium.

However, they warned that unemployment may remain high far into 2010. 

More than 500 people attended the April 23 session featuring the two noted economists.

In opening the program, Dr. Joe Sulock, professor of economics at UNCA, said that “we typically have about 200 people” at the annual seminar, but that there appeared to be more than double that number this year.

In speculating why so many people were at the seminar, Sulock said two reasons might include the “great” reception hosted by Parsec and

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Economists James F. Smith (left) and  David W. Berson predict a recovery of the economy in 2010, although they believe unemployment may remain high.

UNCA’s status as “a great place to be in late April.” Further, he said, it is possible the audience was seeking to hear “objective and professional economic analysis.”

Berson, who lives in California, is chief economist and strategist for the PMI Group; and Smith, who lives in Arden, is chief economist for Parsec Financial.
Regarding the duo, Sulock quipped, “In my opinion, they are they are to the economic profession what (Babe) Ruth and (Lou) Gehrig were to baseball....”

Despite their reputations, Sulock said, the two economists realize they “sometimes have to eat crow” for their past predictions.

On a lighter note, he said Smith has said that “he who uses a crystal ball had better get used to eating broken glass,” while Berson, a baseball enthusiast, had admitted he erring in both baseball and economics.

Berson, introduced as a “Renaissance man” by Sulock, began by noting that, “A year ago, I said I thought we were probably in a recession. That was a good forecast.”

Conversely, he conceded that he also made a bad forecast that “we’d be out (of the recession) at the end of 2008.”

However, “I think there were some very bad policy errors” made by the government last fall,” said Berson, a former Fannie Mae vice president and chief economist and past president president of the National Association of Business Economists.

He said “the economy went over a cliff ... It contracted tremendously.”

Berson termed the downturn “the largest recession in the post-war period.”

Nonetheless, he said, “I think by the end of this year, I think we’ll be out of this recession.” He predicted the recession ending by the beginning by the end of the third quarter or sometime in the fourth quarter.

“That’s the good news,” Berson asserted. “The bad news is unemployment won’t peak until the end of next year” — at 9.5 percent or thereabouts.

“That’s still months away, and even when the recession is done, things like unemployment will continue to get worse for months afterward.”
However, he noted that his projections are based on the use of what he termed sound economic policy — and he feared “there could be more policy errors.”

“There’s about a 35 percent chance that the recession will continue into next year. I see a modest recovery ... I predict 3 percent economic growth next year ... If I’m wrong about the recovery, it’ll be a stronger recovery.”

He added, “In the near term, it might be a longer and deeper recession.”

Berson said he expects gross domestic product to begin growing again by the fourth quarter of this year. Before the turnaround in GDP, “the job market always lags — and housing sales always leads.

“Normally, when a recession ends, you see housing starts perk up. Not this time.

“Although the housing market can recover before the job market, it’s going to be a pretty muted pickup of housing, but it will really gain steam when the job market recovers next year.”

He said the affordability of housing is as high as any time in history, since records began being kept in 1980.

Berson marveled that one can put 5 percent down to get a 30-year fixed loan at 4.5 to 4.75 percent interest — “that’s pretty low.”
“That means people who want to buy a house can afford one. That does not mean they’ll buy one,” though.

In a recent interview, Berson said he was asked if there was anything good that has happened during the downturn.

He said his answer was that a positive out of this recession has been the increase in affordability for first-time homebuyers, noting that 51 percent of home sales in March were to first-timers.

Berson also said that a second thing that causes housing to turn around is demographics.

During a normal economy, he said about 1.3 to 1.4 million new households are formed annually, but “now it’s about 700,000.”
He said new households formed now are finding buying is more affordable than renting.

“I think we’ve seen the bottom in home sales. That’s the good news for housing,” Berson said. “The bad news for housing is, in many parts of the country, home prices are falling. Many of the houses for sale are foreclosures. Besides being unfortunate for the families, foreclosures pull down the prices of all homes in the neighborhoods” because they tend to be abandoned with broken windows and tall weeds.

Berson said Stockton, Calif., “is probably the worst single city in the United States for housing” now, with housing prices down 30 percent.
However, he also included in the “overbuilt” category Arizona, Las Vegas, Nev., and coastal Florida.

“As other places moderate, prices will pick up,” Berson predicted. Indeed, he said “lots of places in Texas” already are up 5 percent.
“Next year, we look for the national average of home prices to be unchanged — that’s a great improvement.

“Now, it’s not going to be the good, old days, with double-digit annual gains” in home values. He added, “That‘s good — double-digit gains aren’t healthy.”

He added, “The second good thing to come out of the downturn is that risk managers have been reawakened ... Those who do get into housing will be tose who can afford it — and they stay in their homes.”

By 2012 or 2013, “home sales will be stronger,” Berson said. “Home prices will be higher and default rates much lower.”

“I think next year when we meet, you’ll feel a lot better about things,” Berson concluded.

Next, Smith spoke, noting that it was his 23yrd year of addressing the seminar and the 20th year for Berson, his long-time friend and colleague.

As a direct result of attending the seminars, Smith said he and his wife moved to the Arden area three years ago. He declared this “the nicest place I’ve ever lived.”

Smith has twice been named the best economic forecaster by The Wall Stret Journal.

Smith noted that “last year, I told you things should be better than they were. I was wrong.”

He noted that Berson already had alluded to one reason for his inaccurate predition  — “three men erring in policies, including (Hank) Paulson, (Timothy) Geithner and (Ben) Bernake.”

“They let Lehman Brothers fail and then crammed Merrill Lynch down Bank of America’s throat.”

He added, “Everywhere else outside the United States is worse off. Asheville is pretty darn good” in comparison to economies elsewhere.
In noting the difficulty of economic forecasting, Smith also stated that “what you think you know about 1929 — that’s all changing.”

To understand then and now, he then recommended reading the fifth edition of “Manias, Panics and Crashes: A History of Financial Crises”  by Charles P. Kindleberger.

From reading the book, Smith said one would learn that every single time the world economic system has faltered, it has surged back.
He also asked, “When governments throw money at the problem — why does that happen? Because they want to get re-elected! Duh!”

In stressing the folly of recent federal policy, Smith said the biggest boom in (U.S.) construction over the last 20 years has been in the building of prisons.

He quipped it is “cheaper to send a child to an Ivy League college than to prison, but the upside of this is they’re not stealing your stuff.”
Smith also noted that “voters in the United States are impatient.” Thus, elected leaders are under pressure to rev up the economy and, “if they don’t, we throw the bums out and get new bums in. The current crowd has one more year to fix the system.”

As far as the current government strategy, he said, “When you throw $11.5 trillion on a problem, the problem will stop. I don’t know when,” though.

As for those who are worried about the future, Smith said, “There’s been no 10-year period from 1880 on when stocks weren’t higher, studies show. Unless you’re over 71, we’ve never seen such a surge in the stock market.”

For his predictions, Smith said, “Housing will be the first thing to take off. Affordability is up. The bottom was in January ... Second will be the vehicle market” to go up.

Following housing and vehicle sales upsurges, Smith said consumer confidence will go up. “If consumers feel better, they spend more,” he noted.

“Consumers started a buying strike during the last holiday period in December.”

Next in the recovery process will be a scenario wherein “small businesspeople become optimists. They are the backbone of the country.”
He said the Federal Reserve “has pulled out all the stops. They can write a check up to the trillions (of dollars) — and it can’t bounce.” He added that the Fed “had a pretty good year last year because the Fed donated $31.5 billion to the Treasury.”

Meanwhile, Smith said, “The rest of the world is in terrible shape. It’s the worst catastrophe since the Great Depression, although not near as bad as the Great Depression.

Smith said that both he and Berson “think the recession will probably end at the end of this year. Normally, a really big recession is followed by a big rebound.”

“I think things are going to be a lot better than most people think ... Look for better times” next year. “Things will get better. We’re pretty close to the bottom — and we may have already seen it.”