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Oct 26
2010

Levy: 60 percent chance of recession

Posted by Stephen Taub in V-shaped recoveryRiskrecessionJerome Levy Forecasting Centerinventoriescapital equipment outlays

Stephen Taub

Let's face it. This is a difficult economy to get optimistic about, even though a fair amount of data is improving.

For every piece of positive news, there is frequently a discouraging report. Today's news that housing values have declined in most major markets is a good example, coming amid a mini-stock market rally due in part to pretty strong third quarter earnings reports.

However, this said, it is rare these days to find someone who actually thinks we are headed for another recession. You know, the V-shaped recovery.

So, it is disturbing to read that one economic forecasting firm determined there is a 60 percent change for a recession in 2011. It is especially upsetting given that the prediction comes from the venerable Jerome Levy Forecasting Center.

Its October, it newsletter, The Levy Forecast asserted that it sees domestic profits eroding and corporate earnings becoming increasingly disappointing, leading to its recession forecast.

Sure, retail sales, inventories and capital equipment outlays have been growing lately, economist David Levy acknowledges in the report. However, he believes retail sales growth over the past year "is exaggerated. "While there may yet prove to be something accelerating sales this past summer that will continue into the future, such short-term strength is not necessarily indicative of a new trend," he adds in the report.

Levy points out certain trends that don't bode well for the future. For one thing, he says falling interest rates can no longer boost the economy since they are already as low as they can be.

Net fixed investment, normally the largest source of corporate profits, remains anemic, "with limited prospects for improvement in the year ahead."

Meanwhile, he says persistently high unemployment means that "continuing wage and salary disinflation is an almost sure bet," aggravating debt quality problems.

Meanwhile, Levy discounts the spurt in capital spending, calling it catch-up and likely to lose steam in early 2011.

He also believes inventories have been growing fast, but they are in the process of becoming overbuilt. "Inventory investment probably peaked in the third quarter," Levy adds.

Other bad omens for the overall economy: Like many others, he expects the personal savings rate to trend upward, Levy is anticipating deeper cuts by state and local governments, a weakening European economy as deficit cutting spreads across the continents, and a further erosion of housing prices.

 Levy's case is very convincing, even to an inherent optimist like myself.

This is why the report is especially disturbing.

Yikes!

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