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Sobering news from an uncannily savvy economist

AUSTIN, Texas -- Economist Lacy Hunt takes a measured view of things. That's what economists do, of course, except for the ones on television. But my regular pilgrimage to the offices of Hoisington Investment Management is a mission in grounding -- Hunt will have assembled one of the best economic chart books in the business.

Over the last 15 and 20 years the fixed-income institutional portfolios managed by Van Hoisington, Hunt, and other team members have beaten the Lehman Aggregate Bond index by about 2 percentage points a year.

That's a long time to be making good calls. It's also a margin of superiority few can claim.

Listening here is good.

Noting that short-term rates are higher than the yield on a 10-year Treasury, Hunt points out that recessions nearly always follow. Add the decline in the leading economic indicators, and that makes it virtually certain we'll have a slowdown next year -- maybe a recession.

No, he isn't ready to declare that recession is inevitable. Oil prices have declined enough that we just might luck through. But the odds aren't good.

Another big factor is the decline in the growth of money.

"We've had two years of contraction. The Fed has brought monetary growth down rather significantly," he says.

His biggest concern: housing. "It's only 6 percent of GDP," he points out. "But it has a disproportionate impact on employment and an enormously disproportionate impact on consumer spending."

It has been so in every economic cycle, Hunt explains, but it is more so this time because of the amount of money people have been borrowing out of their houses to support their spending. With both housing starts and housing prices falling , we'll get a double whammy. The borrowing will end and, with it, so will the spending.

Cash-out refinancing never amounted to more than $50 billion in a year before 2000, his charts show, but is running at more than $75 billion a quarter so far this year.

Lots of people who were pouring concrete and nailing up Sheetrock last year will be looking for work. Since January 2002, Hunt points out, 1.3 million of the 5 million jobs created were related to housing. That's 26 percent of the total.

Needless to say, Hunt isn't alone in worrying about the home price bubble. To cite an extreme, economist Gary Schilling has gone on record expecting a 25 percent decline in housing prices. This would bankrupt millions of homeowners.

You'll be glad to know that Lacy Hunt isn't expecting anything that extreme.

What's worrisome is that other sources of economic strength don't look very promising to Hunt, either.

How about foreign consumer demand?

Not likely, he says.

How about business investment and capital spending?

Hunt, always the proper economist, doesn't say "fuhgeddaboutit" -- but he might as well have. "With GDP slowing, it's very hard to believe capital spending will continue."

The bigger picture beyond this economic cycle is more positive.

Hunt believes we have entered a new period of global markets and productivity. Like the long period from 1871 to 1930 -- with major increases in agricultural, manufacturing, and transportation productivity -- we may be in a long period of low inflation. Back then prices actually averaged a 0.2 percent decline annually. Treasury yields averaged only 2.9 percent.

So interest rates could fall further still.

Could something happen to throw a monkey wrench into this picture ?

"Yes," Hunt says. "We have to worry about the law of unintended consequences. If the new Congress raises the tax rates on investment income, it would put us in a bad position. We can't compete internationally on labor costs. So we've got to have strong capital investment. Raising the taxes on capital would take away our edge."

Scott Burns is a syndicated columnist. E-mail questions to

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