Contained Depression Ahead?
2002: YEAR OF POWERFUL CROSSCURRENTS
Mount Kisco, NY, December 26, 2001 – The economy will more likely than not begin to recover by the second half of
2002, according to the Levy Forecasting Center. However, "both the remainder of the recession and sluggish recovery
will prove more worrisome than widely expected", says David Levy, Chairman of the economic forecasting and consulting
firm. Profits will probably develop a modest uptrend, but the performance will be disappointing. While analysts are
expecting a 15% rise in S&P 500 operating earnings in 2002, the Forecasting Center believes that "full-year operating
earning will do well to top 2001’s by as much as 5% and may fail to rise at all." Domestic financial problems and global
instability will plague the U.S. economy in 2002.
More important than any particular forecast of profits, growth, or interest rates is the message that the economy has
gone so far down an unsustainable long-term path that a major adjustment must occur in one form or another before too
long. This means that it is dangerous to take for granted that well-established cyclical patterns will hold. These times call
for constant skepticism, reevaluation, and flexibility in financial dealings.
As a result of the 1990s financial bubble, the U.S. private debt burden is now so large that it requires low interest rates
and booming cash flow to prevent widespread problems servicing the debt. However, the steep decline in the federal
funds rate is running out of room to continue and booming cash flow is not likely any time soon. According to the Levy
Forecasting Center, the economy will most likely go through a prolonged period of adjustment, or a contained
depression, involving falling asset values, debt shrinkage, and depressed net investment. "A contained depression is
the least painful way to cure the balance sheet problems and lay the foundations for future prosperity."
With unemployment rising into the second half, global deflationary pressures, mounting financial problems, no inflation to
speak of, and at best a sluggish recovery, the Fed will not raise rates for many months. Under these circumstances, the
Forecasting Center believes that a 4% yield on the long bond in 2002 is likely.
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In this month's Levy Forecast...
The Levy Forecast, formerly known as the Industry Forecast, was established in 1949 by Jerome Levy and S Jay
Levy. The Levy Forecast is produced 12 times per year by David A. Levy, S Jay Levy, and the research staff of The
Jerome Levy Forecasting Center, LLC. |
