Lacy H. Hunt, the chief economist of HSBC Holdings, is often in the minority in his predictions. Just as often, it seems, he has been right.

In the early 1990s, while many of his counterparts predicted continued growth, he predicted a downturn in the economy. Before that, when others predicted a recession in the wake of the 1987 stock market crash, Mr. Hunt correctly predicted a period of 4% economic growth.

Now, skeptical of government reports that put unemployment at a relatively benign level, Mr. Hunt is warning that the economy is in for a bitter surprise.

Higher Taxes and Debt

At a conference of the American Institute of Certified Public Accountants in New York last week, Mr. Hunt said that high taxes, tight monetary policy, and a high level of household debt will soon take their toll.

"The situation is very delicate and serious," Mr. Hunt said.

He was not dissuaded from this view the next day, when the Labor Department reported that unemployment had fallen to 6% in May, from 6.4%. The department acknowledged that actual unemployment was virtually unchanged, and that the 0.4% drop reflected a change in its methods.

Mr. Hunt went further than that, saying nonfarm employment probably lost ground in May, despite Labor's official estimate that 191,000 new workers were added to the work force.

The department probably overestimated the gains in small-business employment. Taking away the 70,000 Teamsters truck drivers who returned to work, there may have been a net loss in jobs, he said.

All this means a sharp upturn in unemployment in coming months, Mr. Hunt said.

And unemployment is already higher than believed, he argued. The Labor Department report of one million workers entering the work force between January and April is deceptive because the department double-counted workers with more than one job, he told the gathering of accountants.

And if interest rates do not fall, only another major natural disaster could help keep the U.S. economy growing as strongly as it is today, he said.

What does this mean for banks?

Mr. Hunt said the industry probably is immune to a faltering economy. But he said if rates remain high, banks could be caught with a whole new generation of bad real estate loans.

Vulnerable to Rate Rise

In the last three to six months banks have increased their portfolio of real estate loans, Mr. Hunt said. While banks today are fundamentally healthy, he said, if the Fed does not loosen its tight control of monetary policy, banks could feel the pinch.

"Rates have to come down," he warned the conference, or interest-sensitive sectors of the economy like automobiles and real estate will suffer.

While real estate and commercial loans are still below the levels they were at 10 years ago, banks in the last six months have financed a surge in building expansion, Mr. Hunt said.

Other economists were more optimistic. While the Fed has indeed raised rates four times since Feb. 4, those rates were coming off a 30-year low, said Ken Ackbarali, a senior economist at First Interstate Bancorp.

The rate on a 30-year Treasury bond would have to move past 9%, he said, before the economy really began to take a hit.

It was only natural for the banks to move back into lending after a slow two years, he said. Since 1992, banks have had a large percentage of their assets in investments -- like government securities and fixed-yield bonds -- so banks were very liquid while loan demand was soft.

"The U.S. economy strengthened, the opportunity to add to the portfolio of loans became apparent, and banks began to shift their assets to lending and away from investment portfolios," he said. "This I see as a rational strategy, and the demand looked attractive for consumer loans and real estate loans."

And even if the economy were in a downturn, banks have not made enough real estate loans to make a difference in their outlook, said Al Smith, principal economist for NationsBank Corp.

Upbeat on Real Estate

With vacancy rates finally moving down, real estate looks to be in the first stage of a pronounced recovery, Mr. Smith said. "I don't see any trouble spots in the [banking] industry."

For Mr. Hunt, however, the trouble spots are everywhere. The money supply is growing only at 4% annually, compared with 12% annually after past recessions, he said. This is the worst recovery ever in U.S. history, he said.

There was a dramatic deceleration in the purchase of equipment in April, and manufacturing orders were also down, a telltale sign of problems to come, he said.

Meanwhile, unemployment claims and compensation were up in May, while there was a slowdown in help-wanted listings, he said. Improving employment would not be consistent with these indicators, he argued.

Only Hurricane Andrew in 1992, the midwestern floods last year, and the California earthquake in January have sustained the economic recovery, he said.

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