Nariman Behravesh is chief economist at international consulting firm IHS Gobal Insight and is responsible for developing the economic outlook and risk analysis for the U.S., Europe, Japan, China, and other emerging markets.
Harlan Levy: Do the disappointing job creation numbers - 80,000 new jobs in October — indicate a floundering economy or not?
Nariman Behravesh: I would say not. I would say an economy that’s growing very slowly. We’re certainly not in a recession. We’re in an economy that’s growing probably by 1.5% or 2%. That means that this is not bad news, but its not good news either. It’s blah news. And I think that the worries about a double-dip we had over the summer are probably diminishing.
H.L.: What do you expect in jobs and housing next year and implications for the U.S. economy:
N.B.: Assuming growth is in the 1.5, 2% range, the jobs picture will improve very, very slowly. By the time of the election we’ll be looking at an unemployment rate that will be between 8.5% and 9%, which is not good news for President Obama.
On the housing side, we see some activity, mostly in terms of multi-family housing starts. The rental market is picking up, but in terms of a real bounce-back or turnaround, we don’t expect it until the end of 2012 or the beginning of 2013.
H.L.: What do you expect will happen to the eurozone, with continuing problems in Greece and Italy?
N.B.: There are two points here: The first is that the eurozone is already in a recession, probably a mild recession. The second is that we think that there’s probably a 40% chance that Greece will exit the eurozone, in which case things could get really messy. By that I mean the eurozone recession could get quite a bit deeper. It doesn’t necessarily mean that the U.S. would go into a recession, but it’s certainly possible, depending on how bad things get in Europe.
The efforts to fix things probably were good but not enough. The rescue package needs to be a lot larger than what they came up with a week and a half ago.
The other thing is that obviously things are compounded by the political machinations in Greece. That’s the issue here.
H.L.: Would it be better for Europe to move much closer to a federal government with common fiscal policies and major loss of sovereignty for member nations than a dissolution of the European union?
N.B.: I think the real risk is if they start to move backward, kicking countries out, which could start a significant unraveling of all the progress they’ve made in the last 50 or so years. Europe has benefited tremendously from closer economic ties, but also in terms of politics, this is the longest period we’ve had without a war in Europe.
H.L.: Back to the U.S., what do you think of the level of oversight of financial institutions,, including mid-level brokers?
N.B.: I think the worry here is not so much the institutions that are not regulated - like hedge funds and the MF Globals. Those things have failed in the past without bringing down the whole system. The problem is the banks, and here it’s a very complicated story in that it’s not so much the lack of regulation in the past. It’s the lack of enforcement of existing regulations that’s been the problem.
So Dodd-Frank, the new financial regulatory law, will add more regulations onto existing regulations, but the question is will these be enforced or will they not be enforced the way the older ones weren’t.
Certainly we might end up in the middle of a possible disaster, but this time it will come from Europe. Europe is the single biggest threat to the U.S. and global economies. I’m frankly not completely convinced that things will get better. It’s a very volatile uncertain situation right now.
H.L.: Would you invest in stocks now?
N.B.: I would not shy away from stocks. A lot depends on your time frame. If you’re in the stock market for the long haul, great. If you’re in and out looking to make a quick killing, forget it.
H.L.: What do you see happening in Congress on fixing the deficit, and should there be both spending cuts and more revenue?
N.B.: We cannot fix the deficit just on the spending side, so we are going to need some tax increases, unfortunately not just on the rich.
Taxes are going to go up inevitably.
As to what Congress will do, the reality is that between now and the election next year. not a lot.
But the markets understand the political constraints and are willing to give the U.S. some more time. That’s certainly explains why the long bond yields are so low right now.
H.L.: What do you think of Republicans rejecting Obama’s job plans?
N.B.: This is all political posturing at this point. At one level, they have to be clear that they’re not going to be labeled as the party that killed the recovery. But on another level they do not want to improve Mr. Obama’s reelection chances. That means they’ll probably do just enough not to be labeled as recovery killers but not enough to help Mr. Obama.