Don't expect a radical change in the sluggish U.S. economy any time soon.
``Technically, I don't think we are in a recession, but we are in a difficult economic time and in a reasonably long soft patch. It is an odd downturn and it keeps changing,'' said Nariman Behravesh, chief economist and executive vice president of research firm Global Insight Inc. of Waltham, Mass. Behravesh spoke at the annual meeting of the American Chemistry Council, held June 4-5 in Palm Desert.
``I don't see where the U.S. will go into any steep, deep downturn,'' Behravesh said. ``But the recovery will be very tepid,'' with growth rates of 1.5 percent in 2008 and 2009. ``We will not see decent growth again until 2010.''
One reason for that likely scenario, he said, is that many of the factors driving the downturn are unlikely to change anytime soon.
``Oil prices will stay well above $100 for the next three years or so. There will be no drop in high commodity prices until China goes through a boom-bust. Consumer spending has come to a standstill and housing prices will certainly fall through this year and in 2009, particularly on the East Coast, California and in Florida,'' Behravesh said.
Because of that, the U.S. economy is ``not out of the woods yet with regard to a crisis,'' he said. ``That combination is creating a lot of problems for the country and a micro-recession.''
``The concern is how much of a spillover there will be to the rest of the economy from high energy prices and high food prices,'' said Behravesh. ``If you look at the core'' that is, subtract energy and food prices ``there is no spillover yet.'' Still, he added, all the lights are flashing red except for exports, which have helped manufacturers weather this downturn better than the previous one in 2001.
``The reason to feel fairly good'' is that the weaker dollar has made U.S. goods more attractive in export markets, Behravesh said. ``Manufacturing and high-tech is not getting hammered as it did in 2001 because of the strength of the export market.
``More than 20 percent of the profits of U.S. companies are earned overseas,'' he said. ``That is making this downturn a lot easier. Without the boost of exports, we would be in negative growth. They are contributing 1 percentage point of growth.''
He also said the manufacturing sector was in better shape when this downturn hit than it was in 2001.
``Corporate balance sheets were in good shape, and profits were much stronger than going into this last recession,'' Behravesh said. ``There was no inventory overhang. The inventory-to-sales ratio is below where it was in the last recession. That suggests that the downturn won't morph into something worse.''
However, because the global economy is so intertwined, problems elsewhere could create problems for the U.S., and problems in the U.S. could create problems in other countries, he said.
``Everyone is so vulnerable because everyone is connected,'' he said, pointing out U.S. consumer spending accounts for 18 percent of the global economy. ``Exports from Germany to China slow down when exports from China to the U.S. slow down,'' he said. ``Germany, Japan and China are vulnerable to exchange rates as the U.S. dollar drops. Profits of foreign companies are taking a beating in the U.S.''
There is also concern that either rampant inflation in emerging markets or a shift in the China market, or both, could have ramifications globally.
``What if there is a post-Olympics hard landing in China?'' Behravesh asked. ``There is a worry that China will step on the brakes because their government is quite worried about inflation. They are clearly worried about their economy overheating because the money supply and credit growth are growing too fast.
``What will happen,'' he asked, ``if there is a deceleration in exports from China if they try and cool down the economy?''
Another trouble spot is inflation. It's at a 13-year high in some nations like Russia and India, and emerging economies in South America, he said. ``This is a serious issue and could be setting the stage for a boom-bust in emerging markets by 2010.
``The biggest concern is a China hard landing combined with a deepening U.S. recession and a weak growth/mild recession in Europe,'' he said.
The ACC is based in Arlington, Va.