There are bears -- an then there is the Jerome Levy Economics Institute.
The economists at the think tank in New York's Hudson Rive Valley have been among the nation's most downbeat economic forecasters for more than two years. In November 1990, they began describing the economy as being in a "contained depression."
Their outlook isn't changing.
What's disturbing to the White House and other optimists is that the Levy group has thus far been proven right. After expanding by 2.9% in the first quarter, gross domestic product fell to a meager 1.4% growth rate in the second.
"We expect another economic downturn in 1993," said David A. Levy, vice chairman of the institute, which was founded in 1986 by the Levys and the trustees of Bard College, of which the institute is a part.
S. Jay Levy, David's father and chairman of the institute, extended the grim prediction: "I think things are going to stay in a rather depressed state for at least the next two years."
The Levys' chief evidence? investments in fixed assets such as manufacturing plants and office buildings, what David Levy calls "the real engine of growth," is not occurring. Moreover, no fiscal stimulus, such as a change in individual income tax withholding, is in the wind to help the economy this year.
"I wouldn't want to be selling Easter apparel next year," said the younger Mr. Levy, looking well beyond the Christmas shopping season predictions most economists are now making.
Banks and other financial institutions aren't helping much to stimulate a rebound, he added.
Bank profitability is on the mend, but it's not translating into more loans, Mr. Levy said. He attributed the bounce in bank earnings to "bankfare," his term for the steep yield curve.
Low short-term rates and high long-term rates help banks' interest margins - they can borrow short and invest in long-term Treasury securities - but do little to help the overall economy, Mr. Levy said.
Reluctance to Borrow, Lend
The Levys, who base much of their outlook on studies of corporate profits, maintain that banks that got burned in the late 1980s on real estate and leverage-buyout loans are loathe to take on new borrowers. Moreover, they detect little demand for financing, noting that few companies are making expansion plans.
The younger Mr. Levy goes further, blaming banks for contributing to the current woes by having operated with blinders on during the go-go days.
When major corporations left banks in order to fund themselves directly on the capital markets, financial institutions looked frantically for alternative lending opportunities, he explained. "Excesses developed, such as real estate, but it was so gradual, the banking system didn't realize what was happening," Mr. Levy said.
The Reagan administration's deregulatory bent contributed to the problem by loosening bank and thrift regulations. "Financial deregulation put stresses on institutions to find ways to be profitable," Mr. Levy said. "They were hungry."
The results - a flurry of lending for projects that were overvalued and unneeded - will be with us for years, he added.