Harlan Levy: Do you think the keys to a U.S. economic recovery are continuing good domestic economic news, no more than a mild recession in Europe, and decent annual growth in China, expected to be around 7 percent?
Scott Wren: I think that's a recipe for modest growth in the U.S. I don't think that you're going to see growth that's really strong any time soon, at least sustainably. I continue to think this recovery will be far slower than every one we've seen over the last 50 or 60 years.
H.L.: What other factors are significant?
S.W.: Several are going to keep growth at a slower pace. One is the amount of the debt overhang both on the government side and the consumer side. Also, housing is still a major headwind. We just hit a new low in the median price of an existing home,. Housing is a major problem. Employment, although it is continuing to improve, is also still a major problem. You've got almost 43 percent of those unemployed having been unemployed for six months or longer. That is a secular problem.
Forty weeks is the average duration of unemployment, according to the government. It's close to the record of 40.9 weeks back in November, so we have structural issues. The debt level, housing, and employment are concerns. And this European debt situation won't go away any time soon in spite of the Greek debt restructuring. We're going to revisit European sovereign debt many times in coming years.
H.L.: Do you see any improvement in coming months over the job numbers from the February data - the third month in a row with job gains over 200,000?
S.W.: By the end of the year unemployment will be down around 8 percent, so I do see continuing improvement. It's slow improvement, and I think it will continue to be slow. I think we're in for slow economic growth this year and next year, and we're just getting into the second half of this cycle. We're going to be talking about modest economic growth continuing and modest earnings growth continuing, so I expect as a result, employment will continue to improve as well. I have no predictions for 2013 yet.
H.L.: Is the U.S. housing market near a rebound?
S.W.: I'm just hoping for stabilization right now, and prices have not stabilized. I think a significant rebound is still years forward. The housing market could stabilize late this year or in the first half of 2013, but as far as a rebound, a start of a rebound is several years away.
H.L.: Is the stock market getting ahead of itself?
S.W.: It is a little bit. It's ahead of the fundamentals. I think earnings growth is only going to be 5 percent this year. Global economic growth is slowing, so U.S. growth will be somewhere around 2.2 percent, something like that. We've already seen a good gain this year, and we'll probably end the year somewhere close to current levels.
H.L.: What sectors of the market do you like and don't like?
S.W.: Given the fact that we still have the second half of the cycle to go, we're looking to things like industrials and materials, sectors that will benefit from the continuation of the global recovery. The types of sectors we want to be underweight are health care and consumer staples. We're a little more balanced, now that we're in the middle of the cycle, but we're still leaning to the more cyclical sectors, to add more exposure to those cyclical sectors.
H.L.: What about the Middle East has you worried, and how much?
S.W.: I am concerned about the Middle East. There is a reasonable probability that some sort of military skirmish will erupt involving Syria, Iran, Israel, maybe some combination of that, with the U.S. possibly drawn into it as well. The probability of conflict in the Middle East is not high, but it's at least moderate. We would probably be involved with anything involving Israel. Oil prices would initially go much higher, and that would be bad for global growth and growth in the States. The stock market would also initially have a strong negative reaction.
H.L.: Coming back to domestic issues, is the Republican platform of severe austerity and no additional spending a prescription for worsening the economy?
S.W.: I think severe austerity applied at one time is probably not a good idea, but I believe austerity applied gradually is the medicine we're going to have to take.
My grandmother had a saying, "You've had your fun. Now it's time to take your medicine." I'm a big believer in that. The U.S. has to realize that it's time to take your medicine, and medicine doesn't taste good.
Government spending obviously helps the economy, and creating temporary jobs is helpful, but I don't like borrowing money to do that. If history is any indication, if you borrow money to boost the economy now, the chances of politicians cutting back when times are good are slim to none. That's the problem.
I'm in favor of making a gradual spending cut every year, say 1 percent. But as for dealing with the deficit, we'll just wait for the crisis, which is what the politicians in Washington do, and it's probably sooner than most people think.