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Lone Voice at PCBC Says U.S. Economy Now in Recession
 May 16 is the day that the current U.S. economic recession started, according to James F. Smith, senior fellow and director of the Center for Business Forecasting at the Kenan-Flagler Business School at the University of North Carolina-Chapel Hill.
Admitting that he was out on a limb, Smith told a PCBC audience in San Francisco last month that he is “the only forecaster of the 60-some on the Wall Street Journal panel who says we are currently in a brief, mild recession.”
The good news, he said, is that the economy will move on to much stronger growth in relatively short order, including a pick-up in housing.
Smith is basing his forecast on the inversion in the yield curve, in which rates on long-term Treasuries had been running higher than those on short-term notes from last July up until about the time of his presentation at the city’s Moscone Center.
He said that inversions of the yield curve lasting four months or longer preceded 17 recessions during the 20th century and only four recessions started without one.
The national economy slumps into a recession roughly 11 to 13 months following the onset of an inversion, he said.
“The expansion was murdered in its bed” by the monetary policies of the Federal Reserve, he said, but not too much damage has been inflicted, with declines in growth ranging from 1.4% in the current quarter to 2.6% in the third quarter before a rebound by the end of the year.
Fortunately, this will force the Fed to reverse course and “cut interest rates until things take off,” he said.
Smith predicted that single-family housing starts will bottom out in October or November and that economic growth will be “a lot better” next year than this year and stronger than expected, with pocketbook issues breaking decisively in favor of whomever becomes the Republican presidential candidate.
Looking at the current state of the housing market, Smith said that “there is no housing bubble in the U.S.” and today’s downturn scarcely resembles the stock market correction that some have been looking to compare it to. “There were seven years of zero growth in the stock market, and that is not what has happened to people who bought a home,” he said.
Bubbles typically have occurred in the prices of coins, raw land, tulip bulbs and stocks, but not housing, he said, because “you can always live in your house.”
On the world scene, he noted that China and India are the up-and-coming economic players, but they have a long way to go before they approach the size of the economy in the U.S. China has been growing like post-World War II Japan, he said, with annual growth averaging 9.7% since 1979, but its real per capita income has grown to only 24-cents more than it was in 1900.
China has become the world’s preferred platform for manufacturing, but its economy today is only one-third larger than the size of the California economy, and the economy of India is smaller than New Jersey’s, he said.
Whether Smith turns out to be correct in his assessment that the U.S. economy has stumbled into a recession won’t be immediately apparent. Although he is confident that his forecast is right on the money, “we won’t know for months and months and months,” he said.
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