Homer Alaska - Business

Story last updated at 6:00 PM on Wednesday, October 5, 2011

Economists bring gloomy prognosis to Juneau

By Pat Forgey
Morris News Service - Alaska

JUNEAU — The United States is likely facing years of lagging growth as the country continues to try to get its financial house in order, the Alaska Permanent Fund Corp. Board of Trustees and other Juneau investment professionals were told late last month.

"We have a pretty cautious outlook for the U.S. economy," said Goldman Sachs economist Sven Jari Stehn.

And that's the optimistic view, said the member of the firm's New York-based U.S. Economic Research Group.

There is "some clear downside risk," Stehn said. "The risk of recession is about one in three, if not a bit higher."

Stehn was one of three economic experts who came to Alaska to address the corporation's Economic Forum on Sept. 29 at the fund's Goldbelt Building headquarters.

Joining Stehn on the forum panel were John Graham of Rogge Global Partners and Ron Temple of Lazard Asset Management.

The audience were staff from the Permanent Fund, the Department of Revenue's Treasury Division and other local members of the financial community.

Michael O'Leary of Callan Associates, an adviser to the board, moderated the panel.

Rogge's Graham wasn't much more optimistic. The country is having more difficulty in coming out of the recent recession than was anticipated, and will continue to face challenges, he said.

"It's the weakest recovery since World War II," Graham said.

"The de-leveraging has just begun," he said. "We have long way to go in de-leveraging."

Lazard's Temple said that would continue to be painful for the economy.

People borrowed too much money without the ability to pay it back, he said. The amount of consumer borrowing has been cut in the last few years, but more than half of that reduction came from defaulting and write-offs, not from being paid off, he said.

"The consumers and the financial sector had binged on debt for years," he said.

Graham acknowledged his own industry's role.

"We gave money to people who had histories of not paying us back," he said.

Temple said there are still houses being foreclosed on, and until the home surplus is out of the system it will hold back the economy, and it won't be easy to work through.

"We think it will be another six years before we get rid of the housing overhang," he said.

In part, that's because lenders are now requiring significant down payments, which they didn't do before.

Graham, who focuses on international bond markets, says every country deals with financial issues differently.

In the U.S., a brief period of budget surpluses led to tax cuts, but countries such as Canada, Australia and Norway reacted much differently, sometimes creating sovereign wealth funds such as the Alaska Permanent Fund.

"Australia built a Future Fund instead of having tax cuts," he said.

Stehn said his firm's projection was for 2 percent growth in the year ahead, but that it would be 3 percent if not for the government's own de-leveraging as it tries to deal with the federal debt.

Either spending cuts or tax increases will act to limit the economy by acting as a drag on the economy, although fiscal or monetary stimulus might minimize that impact.

A budget deal that provides for future cuts after the economy rebounds may be the way to go, he said.

Various members of the panel said additional threats to the economic recovery could come from political deadlock in the United States, spillover effects of the European debt crisis, or surprises out of China.

However, Temple said, despite aversion in Washington, D.C., to taxes, they were going to have to be combined with proposed spending cuts to prevent too much harm to the economy.

"You have to solve the problem from both sides of the equation," he said.

One positive note was none of the economists saw inflation as much of an immediate threat.

Continued depressed housing prices would also hold down rents and inflation, all agreed.

"We think inflation will behave quite benignly over the next couple of years," Stehn agreed.

Pat Forgey is a reporter for the Juneau Empire.