LA JOLLA, Calif. -- Two top economists launched WesCorp's Future Forum with the same good news, bad news scenario many industry economists have already predicted: The forces driving the current economic downturn are severe and unique. However, thanks to a lack of traditional recession indicators, it shouldn't be terribly severe.
But, it will be a long recovery, said Joe LaVorgna, Chief U.S. Economist at Deutsche Bank. He was followed by Todd Buchholz, former White House director of economic policy, who spoke on global economic influences.
LaVorgna pointed out that household consumption is outpacing household income at such a fast rate, it will limit the pace of economic recovery. Household spending and debt are so out of control, LaVorgna said some economists are predicting household spending will reach 500% of household income this year.
"And, consumers spend around 4.5% of their income on energy, up from 3% a few years ago," LaVorgna said. While the economist stopped short of predicting energy costs will require 7% of consumer budgets by year-end, as other economists have, he said an increase to 5.5% still "posts a dramatic downside to economic recovery."
However, he said oil prices can't remain high above $100 per barrel for long for two reasons. First, it will "kill the economy," and secondly, the politics of such a dramatic wealth transfer from oil rich countries to importing countries won't permit it. Expect to see solutions offered up from presidential candidates soon, LaVorgna said, and potentially some legislative relief.
Buchholz said the entire world is in a new era of hyper competition, in which nearly everyone plays a middleman role in delivering commodities. Successful businesses often find ways to cut out or greatly reduce middleman costs.
"Everybody in world economy must face this prospect," Buchholz said. "Unless you're a peasant farmer in yoked to a yak in Tibet, you must be able to explain why you're in business, and what value you bring to the table. It's forcing better efficiencies and more competition."
The former George H.W. Bush economic adviser predicted that education will be the world's most important long-term economic issue.
"Areas that harness intelligence will survive because IQ-based jobs are on the increase," Buchholz said. "When you look at standardized test scores, our kids are like the Jamaican bobsled team of education. It's a race for IQ points, not [Federal Reserve Chairman Ben] Bernanke or taxes, that will be the most important long term."
Though the men disagreed about whether or not there is an actual recession--LaVorgna said yes, Buchholz said no--both agreed the current economic slow down lacks some traditional recession indicators, like massive layoffs, as well as excesses in capital spending and inventories. A weak U.S. dollar is boosting exports, which accounts for 14% of the GDP, and is helping keep the economy afloat, LaVorgna said.
"At this point in past recessions, weekly jobless claims have been much higher, so pink slips aren't going out nearly as fast, and there are two reasons for that," Buchholz said. "Good workers are hard to find, and companies have more cash on hand to weather the storm. There's a hiring freeze, but no massive layoffs, and inventories aren't stacked up. The economy will be okay, but it's no reason to buy champagne."
LaVorgna predicted the Fed will cut rates again later this year, and the economy will be back to normal by 2010.