Top Economist: U.S. Avoids Recession, So Far

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Top Economist: U.S. Avoids Recession, So Far

Jim Meyers Thursday, May 15, 2008

The U.S. economy is not in a recession and will likely avoid one this
year, 
declares UCLA economist Edward Leamer in an exclusive interview with 
MoneyNews.com's Financial Intelligence Re****t. Leamer, director of the 
university's Anderson Forecast and one of the country's leading
economists, 
first warned about the housing bubble three years ago.

Currently, Leamer tells FIR that he expects U.S. economic growth will 
produce "a disappointing outcome rather than a catastrophic one."

Leamer explained why he doesn't see a recession now or in the immediate 
future:

"To have an official recession, there has to be a lot of job loss. Those
who 
are calling for a U.S. recession are predicting that the unemployment
rate, 
which is now at about 5 percent, will be 6 percent or more by the end of
the 
year. This would require at least 1.5 million workers to be laid off.

"If you look around to find sectors where those workers might lose their 
jobs, the traditional sectors are construction and manufacturing. Outside
of 
those two sectors there isn't much job loss. We think that construction is

poised to lay off a lot of workers. But manufacturing is not."

During the recession of 2001, the U.S. lost 3 million manufacturing jobs
and 
none have come back, Leamer noted, so there is now little fat in 
manufacturing jobs to cut.

"It just doesn't seem likely that manufacturing can slough off enough jobs

to make this a real recession," Leamer told FIR.

"There are not going to be enough layoffs to qualify as a traditional 
recession, but there will be some uncomfortable elevation of
unemployment...

"So, even in the face of strong public opinion suggesting we are already
in 
a recession but absent any data that would constitute a decisive attack on

our no-recession forecast, we are nervously holding firm - no recession
this 
year."

The weak dollar and rising ex****ts are also helping the manufacturing 
sector, said Leamer.

"This is the other silver cloud on the horizon, and a reason to be 
optimistic about the U.S. economy. Ex****ts could be the driver that will 
pull us forward in the year ahead.

"Ex****ts alone are not typically strong enough to save the economy from an

incipient recession. But ex****ts are a very positive aspect of the
situation 
right now."

Historically, a recession is accompanied by a big drop in orders for 
production, but that "isn't here yet," Leamer said, another indication
that 
a recession will be averted.

Asked if a sluggish economy would weaken demand for commodities such as
oil 
and bring about a drop in its price, Leamer observed:

"Weakness in the U.S. economy will come with some reduction in the global 
demand for oil and a decline in the price of oil denominated in euros, for

example, but also a decline in the value of the dollar as investors look
to 
other countries.

"The net effect of these two opposing forces could well be, surprisingly, 
higher oil prices in dollars, not lower."

There is one factor that could lead to lower oil prices - the
co-dependence 
of the U.S. and China.

"This could easily unwind in part because the U.S. consumer cannot
continue 
to overspend," Leamer told FIR.

"As the U.S. consumer slows spending, this could cause slowdowns in China 
and across Asia. If that occurs, you could see weaker demand for energy 
inputs and all the other commodities. Then there could be significantly 
lower energy prices, in euros, anyway.

Leamer also said a slowdown in China is "inevitable."

"Think of it as a business model change. China's business model has been
to 
sell products to the United States and also give us loans to afford their 
products. How long is that business model going to last? Either the lender

or the borrower is going to rethink this relation****p sometime."

Leamer warned that stagflation is likely, due to "not much optimistic
upside 
potential for economic growth and a lot of problems on the inflation front

with a declining value of the dollar."

"I think that the Federal Reserve and its policies will inevitably lead to

rising prices but not have much effect on growth," Leamer said.

Leamer also said that the stock market has "overreacted" to the recession 
risk. As a result, the market has undervalued U.S. equities.

As a result, Leamer said, now is a "good time to buy."