Lehman says US growth will slow in 1999 and still no signs of inflation. Japan will continue to be a disaster and Europe outlook bearish. Here is the story. Jeff
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U.S. Economy
Wed, 03 Mar 1999, 3:21am EST
Lehman Sees Slower U.S. Economy, Deeper Japan Slump (Update1)
Lehman Sees Slower U.S. Economy, Deeper Japan Slump (Update1)
(Rewrites first paragraph.)
New York, March 2 (Bloomberg) -- U.S. economic growth will
moderate from a boom to a rumble this year, though it will remain
a bright spot in a stalled world economy, said Stephen Slifer,
chief U.S. economist at Lehman Brothers Inc.
Japan's slump could get worse before it improves, delaying
any growth for at least five years, Slifer said at a seminar at
the bank's New York headquarters. The euro region, too, faces
difficult years as governments grapple with structural reforms
needed to fuel employment and contain social security costs.
In the U.S., growth will brake to 2.5 percent in the first
quarter after 6.1 percent in the fourth quarter, and the
inflation rate will remain unchanged, Slifer said. He doesn't
expect a recession, citing what he called the best combination of
fiscal and monetary policy in a half century.
''We're not looking for a recession, to be sure, but we are
looking for substantially slower growth,'' Slifer said. ''We are
looking for an up-tick in unemployment'' and slipping wages.
Lehman points to a growing U.S. trade deficit -- already at
record high levels -- as part of the reason for the slowdown,
forecasting it will knock 1.5 percent off gross domestic product
this quarter.
The worsening recession in Japan and a weaker yen will
contribute to the deficit by reducing Asian demand for U.S.
exports, he said. Consumer spending, which is powering America's
eight-year expansion, will also slide this year as the U.S. stock-
market advance slows, diminishing the so-called wealth effect
from rising stocks ''that made consumers want to spend.''
Slifer also cited waning corporate investment spending and
''a laundry list of trouble spots in the world that aren't fully
priced in'' to U.S. asset values.
Japan-Style Depression
Japan is one of those problem areas. It's already suffering
its worst recession since World War II, and Slifer said economic
growth won't materialize for five years or more. Furthermore, he
said, there would have been no growth in Japan for the past nine
years had it not been for government spending.
''You have things happening in Japan that haven't been seen
in industrialized nations since the 1930s,'' Slifer said. ''Japan
is in some sort of depression.''
The trillions of yen Japan says it will spend to bail out
its ailing banks won't stimulate borrowing for four to five
years, Slifer said.
''The Japanese people have simply lost confidence in the
government and, as a result, conventional economic measures
aren't working,'' he said. Lehman forecasts the yen will weaken
to 130 per dollar this year from 120.22 late today.
''The next accident waiting to happen'' in the world economy
may be in Europe, Slifer said. The 11 euro nations haven't
''created a single job in the private sector'' since 1993,
according to Lehman's calculations.
Bad Timing
The lack of employment is stifling tax revenue and boosting
welfare costs at a time when social security expenses are
escalating and government spending is constrained by budget
deficit caps, Slifer said.
Lehman forecasts the euro will strengthen to $1.20 by year-
end from $1.0935 now as U.S. growth moderates and as the Federal
Reserve cuts interest rates twice while Europe cuts once. That's
down from the $1.26 year-end exchange rate Lehman expected
earlier this year when it was forecasting four U.S. interest rate
reductions.
Slifer said the euro could weaken after this year as the
region's structural problems compound. ''Europe needs major
structural reform,'' he said.
Other global ''speed bumps,'' including Brazil, could get in
the way of U.S. growth, Slifer said.
''We're going to have another leg of this mess,'' he said,
adding that won't send U.S. stocks into the kind of free-fall
experienced late last year, after Russia devalued its currency in
August and defaulted on overseas debt.
''There's a lot less leverage out there than there was last
year,'' Slifer said, ''so even if we hit some bumps the impact
won't be as great.''
The U.S. economy is also secure enough to survive a jolt, he
added. ''Today is the first time you have good fiscal and
monetary policy taking place simultaneously'' since the 1950s and
1960s, said Slifer, adding that two-thirds of outstanding U.S.
debt will be repaid by 2010.
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