MINNEAPOLIS – Suppose that everything you know is wrong.

Consider the commonly held belief that corporate America is headed into a recession, tapped out for cash.

Not so. Cash compared with total corporate debt is near a 50-year high.

Certainly consumer debt appears unmanageable, with late payments nearing record levels on credit cards and real estate, right?

Not true. The percentage of home loans 30 days or more past due, while rising, is nowhere near record levels.

You say troubled home and auto loans are dragging down the economy as never before?

Wrong again. While together such loans lopped 1.5 points off U.S. economic growth in recent quarters, it has been worse. In the final three months of last year, housing and auto pared more than 2 points from the chief barometer of economic progress.

Worst is behind us

“Most of that, I’ve got to believe, is behind us,” said Jim Paulsen, chief investment strategist at Wells Capital Management.

Troubled home and auto loans may be worsening, he said, but the pace is slowing: “It’s not going to take as much off of GDP (gross domestic product) growth” as in the past couple of quarters.

In a paper published this month, Paulsen argued that the economy has more going for it than popularly believed.

The pluses, he said, include no excess inventories, no bloated capital spending and no bulky labor surplus.

“While lack of confidence probably held back the recovery (after the 2001 recession), it may also mitigate the severity of the current recession,” Paulsen wrote. In recent years, he said, businesses have not overspent, overproduced or overhired – imbalances that have contributed to past economic downturns.

Paradoxically, the president, Congress and Federal Reserve officials have stoked fears instead of calming them, in Paulsen’s view.

‘Fear crisis’

“We’ve never had a fear crisis like this,” he said. “All of our monetary and fiscal tools are to restore economic fundamentals. When it comes to fear, our toolbox is empty.”

In earlier economic crises, three of every four problems were fundamental roadblocks to economic growth, Paulsen said. “This one is three-quarters fear.”

Not everyone agrees, however.

“That sounds like kind of a bizarre statement,” said Keith Hembre, chief economist at the First American Fund, an arm of U.S. Bancorp. “I’m not certain how to refute it, but I certainly wouldn’t agree with it.”

The numbers that offer Paulsen comfort aren’t the only ones to watch, Hembre said. In the year ahead, he sees cause for concern.

“We’ll see the biggest rise in the unemployment rate since the early 1980s,” Hembre said. “To me, that’s real economy, real people and real recession.”

The income and balance sheets of U.S. companies may look good now, but wait a few months, he added. “Earnings are going to be under significant downward pressure.”

David Wyss, chief economist at Standard & Poor’s in New York City, said he agrees with most of Paulsen’s interpretations of recent economic data, save for one: the cash-rich status of business.

“What we’ve found is that the big companies are in extremely good shape,” Wyss said. “Smaller companies aren’t.”


Only one sector of the nation’s economy – housing starts and home loans – is out of kilter compared with past recessions, he said. Sector after sector may be slowing, but Wyss and other economists wince at comparisons with the Great Depression, when economic activity collapsed and one in four would-be workers were without jobs.

“We’ve gotten way too paranoid about this,” Wyss said. “What we’re seeing for credit cards is a pretty normal recession behavior,” he added. “One other thing we’ve noticed is that numbers that we’re getting from car loans are doing OK.”

Keith Leggett, senior economist at the American Bankers Association in Washington, said he believes – as does Paulsen – that the economy is stronger going into what likely will be called the 2008-2009 recession than it was on the cusp of the last brutal recession in the early 1980s.

“We don’t know how deep or how long this recession is going to be,” Leggett said. “But going into it, we’re in very good shape.”

With the exception of multibillion-dollar losses by some Wall Street titans, the banking industry came into the latest downturn with “pristine” balance sheets, Leggett said.

“Yes, defaults will rise,” he said. “But they’re rising off of extremely low numbers.”

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