Dear Mr. Berko:

Can you tell me without beating around the bush if there will be a recession this year or next and, if there will be, can you tell me why? Can you provide me with the names of a half-dozen industries that will not be affected or will be profitable if we have a recession?

I’ve asked several well-known market pundits, and they all beat around the ball. Of course, all the analysts at all the major brokerage houses are roaringly bullish. Can I depend on you for an honest answer?

T.W., Fort Walton Beach, Fla.



Dear T.W.:

It’s not politic to mention recession, and it’s certainly not politic to even hint that a recession is possible. But certain as I am that the sun will rise tomorrow, I am as certain there is an 87.5 percent probability that a recession looms within the next six months to a year. To deny the very real possibility of a recession (others prefer to use a less contentious word, like slowdown) is to disavow empirical evidence and renounce the existence of an economic cycle.

Of course there isn’t an analyst on the Street who has the courage to use the “R word,” let alone admit that a recession is a real and almost inexorable possibility. However, the real story may be clearly recorded for posterity by the recent negative changes in market value of thousands of public companies.

According to the National Association of Realtors, the housing market accounted for 33 percent of all U.S. growth in the past three years. The housing market is responsible for 21 percent of our U.S. gross domestic product, and 40 percent of disposable household income is spent on housing and housing-related goods and services. That’s just the housing market and does not include commercial or industrial construction, which increases those numbers between seven and 12 percentage points, depending upon who is calculating.

The construction market is responsible for employing more people than any other industry … by orders of magnitude. In the past few years, the housing market was so explosive that the Big Bang by comparison was barely a burp.

Yes, I believe we are headed in the direction of a recession. Between January 2001 and June 2003, under the leadership of Federal Reserve chief Alan Greenspan, the Federal Open Market Committee frantically began lowering the federal funds rate from 6.5 percent to 1 percent. The Fed lowered rates too fast, too much and bulldozed the economy into overdrive.

After 12 months of interest rates flat as a flapjack at 1 percent, the economy became spring-loaded and in June 2004 the Fed felt compelled to begin raising rates to cool the economy. Two years and 17 rate hikes later, “The Mumbler” and now Ben Bernanke have nudged rates to 5.5 percent. They became impatient, raised rates too much, too fast and I believe overcorrected again. Higher rates collapsed the housing industry and may now put a hex on consumer demand.

During the next six months, DuPont might be manufacturing less synthetic fiber for carpets, Weyerhaeuser could be producing less lumber and Hughes might be selling fewer plumbing fixtures. Home Depot will sell fewer lighting appliances, while Sherwin-Williams sells less paint. Whirlpool will make fewer washers and dryers, while GAF sells less roofing material and Rheem fewer air-conditioning units.

As fewer people are employed producing, transporting, selling and installing these products, the economy might slip into recession.

Corporations will report lower revenues, and as earnings fall, they will reduce their staffs. Household income will decline, and as a result, so will demand for new cell phones, TVs, vacations, clothing, electronics, toys, computers, tools and recreational vehicles. Prices — especially home prices — will begin to crash, foreclosures will become alarming, unemployment will reach uncomfortable levels and the stock market may react accordingly.

Then the Fed will begin to lower interest rates as it tries to jump-start the economy once again. We are watching some of these events happen now, especially with the recent fall of commodity prices and home prices.

There are many industries that will not be affected by a coming recession. The liquor (especially beer and wine) industry. Pawn shops, refinance and small-loan companies, banks that make subprime loans, discount department stores, infrastructure construction (roads, bridges, sewers), defense/aerospace, retail, food, tobacco, gambling and credit-counseling companies. The education field, funeral service industry, motion pictures, games and toys, home repair, auto parts and medical services, to name a few.

This is my no-holds-barred economic forecast for the next two years. However, I must remind you that the purpose of all economic forecasts is to make astrology look good.



Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

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