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1/9/08

Businessweek: US Economy: Hembre's Farsighted Forecasts

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US Economy: Hembre's Farsighted Forecasts

Economist Keith Hembre was one of the few economic forecasters to call it right for 2007.So what does he expect in 2008? Hembre is making an even sharper break from the consensus as one of only two economists—Richard Berner of Morgan Stanley (MS) is the other—who see a shallow recession on the horizon. Hembre admits forecasting two straight quarters of declining economic output is "going out on a limb" but he points to four factors that "tip the balance."

Tops among the warning signs is corporate profits, which Hembre views as a leading indicator of hiring. A third-quarter decline in profits and expectations of another fall in fourth-quarter earnings points to an even weaker labor market in 2008. The ongoing stretch of more than a year with the Fed funds target rate exceeding the 10-year Treasury rate is also a "pattern that's typical of recession," says Hembre. The sharp drop-off in consumer confidence and the dramatic fall in home construction and prices round out the list of indicators pointing to more turbulence ahead.

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