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NEW YORK — Just as the U.S. economy is strengthening, other countries are threatening to drag it down.
U.S. employers are creating jobs at the fastest pace since the late 1990s, and the economy finally looks ready to expand at a healthy rate. But sluggish growth in France, Italy, Russia, Brazil, and China suggests that the old truism: “When the U.S. sneezes, the rest of the world catches a cold,” may need to be flipped.
Maybe the rest of the world will sneeze, and the United States will get sick.
That’s the view of David Levy, who oversees the Levy Forecast, a newsletter analyzing the economy that his family started in 1949 and one with an enviable record. Nearly a decade ago, the now 59-year-old economist warned that U.S. housing was a bubble set to burst, and the damage would push the country into a recession so severe the Federal Reserve would have to slash short-term borrowing rates to their lowest levels ever to stimulate the economy.
That’s exactly what happened.
Now, Mr. Levy says the United States is likely to fall into a recession next year triggered by downturns in other countries, the first time in modern history.
“The recession for the rest of the world ... will be worse than the last one,” says Mr. Levy, whose grandfather called the 1929 stock crash and whose father won praise over decades for anticipating turns in the business cycle, often against conventional wisdom.
Mr. Levy’s forecast for a global recession is extreme, but it’s worth considering given how much is riding on the dominant view that economies are healing. Investors have pushed U.S. stocks to record highs, and Fed estimates have the United States growing at an annual pace of at least 3 percent for the rest of the year and all of 2015. Investors also have poured hundreds of millions of dollars into emerging market stock funds recently on hopes economic growth in those countries will pick up, not stall.
Worrisome signs are out there.
Unlike their U.S. counterparts, European banks are stuck with too many bad loans from the financial crisis. Business debt is too high. And confidence is fleeting, as investors saw earlier this month when stocks sold off on worries over the stability of Portugal’s largest bank.
In China and other emerging markets, the problem of relying on indebted Americans to buy more of their goods each year and not selling enough to their own people means a glut of underused factories.
“The world hopes to ride on the coattails of the U.S. consumer,” says Eswar Prasad, an economist at Cornell University, “but the U.S. consumer isn’t in a position to take on the burden.”
Emerging markets bounced back faster from the financial crisis than did rich countries, but Mr. Levy thinks a big reason for that has made things worse. Overseas companies poured money into factories, machines, and buildings to make things on the assumption that exports, after snapping back from recession lows, would continue to grow at their prior pace. They have not, because companies had been investing too much to expand production before the crisis too.
“You build factories and stores, and they can’t pay for themselves,” says Mr. Levy, chairman of the Jerome Levy Forecasting Center, a consulting firm. “Businesses can’t generate profits, and they start to contract.”
Compared to such fragile economies, Mr. Levy says the United States is in decent shape. Like most economists, he’s not worried about the nation’s 2.9 percent drop in economic output in the first quarter. He expects growth to return, but not for long, as a recession in Europe or emerging markets spreads to the United States.
Mr. Levy says the United States is more vulnerable to troubles abroad than people realize. Exports contributed 14 percent of U.S. economic output last year, up from 9 percent in 2002. That sounds good, but it also makes the country more dependent on global growth, which, in turn, relies more on emerging markets. Those markets accounted for 50 percent of global output last year, up from 38 percent in 2002.
Mr. Levy predicts a U.S. recession will throw its housing recovery in reverse and push home prices below the low in the last recession. He says panicked investors are likely to dump stocks and flood into U.S. Treasurys, a haven in troubled times, like never before. The yield on the 10-year Treasury note, which moves opposite to its price, is likely to fall from 2.5 percent to less than 1 percent — an unprecedented low. In 2012, when investors feared a breakup of the euro-currency bloc, the 10-year yield fell to 1.4 percent.
Mr. Levy comes from a family with a good record of running against the crowd.
His grandfather, Jerome, didn’t just call the Great Crash of 1929, he sold his stock and liquidated his wholesale goods business in anticipation of it. Right after World War II, when many experts thought the United States was sure to fall into another depression, his father, Jay, accurately predicted a rapid expansion. In late 1999, his uncle, Leon Levy, a hedge fund manager and collector of antiquities, invited this reporter into his office, pointed to a bust of a rich Roman, and mused on the fleeting of fortune. He then predicted that the new generation would be laid low. The dot-com crash began a few months later.
This Mr. Levy thinks the origin of the world’s economic malaise is far more complex than investors focused on the housing-collapse think. The problem is not just that Americans took on mortgages they couldn’t afford but too much borrowing of many kinds in many countries. This buildup of excessive debt started so long ago — Mr. Levy dates it to the 1980s in the United States — that people no longer know what’s prudent.
But does this mean a U.S. recession is coming?
Steven Ricchiuto, chief economist at Mizuho Securities, also thinks people are missing signs of a coming global slowdown, but the U.S. economy will continue to grow. Daniel Alpert, author of a grim book called Age of Oversupply about the glut in exports from foreign countries that so worries Mr. Levy, doesn’t think the United States will fall into recession, either.
And Cornell’s Prasad, who sees many of the same problems as Mr. Levy, suspects emerging economies may be “bottoming out,” suggesting investors buying their stocks now might not be so stupid after all.
Still, Mr. Levy has proved more right than wrong lately.