CHICAGO The U.S. economy wont go into recession in 2008, but it might happen in late 2009 or 2010, said Diane C. Swonk, chief economist and senior managing director at Mesirow Financial.
A recession can be averted (in 2008), but we are skating dangerously close, Ms. Swonk said at Mesirows 2008 outlook meeting for clients in Chicago on Dec. 5.
With income inequality between rich and poor at Depression-era levels and widening, oil flirting with the $100-a-barrel mark and expanded exports accounting for half of third-quarter growth, the economy looks better on paper than it feels to many of us, she said.
Ms. Swonk sees the income gap as a very large risk going forward, especially in how it could affect the 2008 presidential election. She urged voters to pick a candidate with an economist on staff and warned against electing a populist or isolationist. Although she would not name names, her comments echoed a Dec. 5 Wall Street Journal editorial that charged Republican candidate Mike Huckabee with exhibit(ing) protectionist instincts and deliver(ing) populist sermons against income inequality.
She predicted credit will continue to ease in 08, and that the economy is in a relay race and needs a new driver of momentum to carry the baton. Non-residential real estate housing is still robust, there is a backlog in commercial construction, and high-end hotels and extreme vacations are on the rise. Businesses are making their largest technology upgrades since 1999, deciding that Microsoft Inc. has finally worked out the bugs in its Windows Vista operating system.
At 3.5%, world growth next year will outpace domestic growth of 2.5%. News that Iran isnt as close to nuclear weapons technology as once thought is encouraging, Ms. Swonk added, predicting an internal overthrow of President Mahmoud Ahmadinejad.
Mesirows annual event featured predictions from other Mesirow executives, too. Michael A. Crowe, senior managing director for equity management, said 93% of November stock market drops are followed by positive December gains. He also predicted for 2008 that: earnings growth will slow to 5.5%; the S&P 500 will return 5% to 7%; market volatility will continue; and that large-cap stocks will continue to beat small caps, while growth will continue to beat value.
Fixed-income Senior Managing Director Steven P. Luetger picked agency, mortgage-backed and asset-backed securities to be winners and panned bonds from the corporate sector, where profits will slow.
Mark E. Sacks, senior managing director for private equity, predicted a slowdown in leveraged buyout fund-raising, which would be the first drop in four years. He said LBOs will require more equity and incur higher debt costs, and valuations will drop accordingly. Venture capital investments will rise 10% and private equity returns will be 400 to 600 basis points over the S&P 500, Mr. Sacks said.
Steven C. Vogt, chief investment officer, called the structural damage inflicted by the subprime contagion substantial. He recommended shorting credit markets, going neutral on hedged equity, and bypassing domestic event strategies for those in Europe.
Volatility will continue in the $3.2 trillion-a-day currency market, said Gary C. Klopfenstein, senior managing director. He said dollar use by sovereign wealth funds and Chinas economy will have the biggest impacts on the dollar in 2008.
The downturn in institutional real estate investing has meant a return to fundamentals. Were looking for managers who have brick and mortar under their fingernails, said Joshua K. Daitch, managing director. Rents are growing and supply and demand are in good shape. Its a relatively healthy market today, Mr. Daitch said. International investments will continue to expand. He expects the NCREIF Property index, which has averaged annual returns of more than 17% since 2004, to deliver 4% to 6% in 2008.