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

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 Report.

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:

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"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."

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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 exports 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. Exports could be the driver that will pull us forward in the year ahead…

"Exports alone are not typically strong enough to save the economy from an incipient recession. But exports 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 relationship sometime."

[Editor's Note: To get a FREE copy of Financial Intelligence Report, including our interview with Edward Leamer — Click Here Now]

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."

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