Ruminations From Rubenstein

From time to time, I find it helpful to seek insight on how the economy is doing from people who are actually on the firing line -- business executives actively engaged in navigating today's turbulent economic waters. One such is David Rubenstein, founder of the Carlyle Group, a private equity firm that owns 240 companies across the industrial and service sectors. During a breakfast at the Washington Economic Club last week, Rubenstein offered his perspective from both the micro perspective of the performance of his companies, and also macro judgments.

Rubenstein is not sanguine about the European situation where high sovereign debt levels, banking liquidity issues and structural problems are already bringing on a recession that will have repercussions here. He expects the stronger countries to find a way to save the euro, but some nations may drop out and the euro will fall significantly in 2012.

He is more optimistic about the U.S. economy now growing at about 2 percent and likely to continue at that level through 2012. Most firms are performing well and inflation remains muted, but growth is not nearly enough to make much headway against unemployment. The biggest problem is political gridlock in Washington that makes it impossible to address our fundamental economic issues and begin reducing the $15 trillion debt that is not sustainable.

Rubenstein is even more optimistic about the economic outlook for China and other Asian nations. Though he recognizes China has excess residential capacity and inflation is running about 6.5 percent, he suggested that any country that can grow at more than 10 percent a year for a decade can engineer a soft landing.

As for our ever volatile markets here at home, Rubenstein acknowledged there is less correlation today between equity markets and economic fundamentals than in the past, and that the markets seem more driven by macro headlines than the real world of consumers and capital investment. Interestingly, he mentioned David Swenson's focus on the absolute return concept which emphasizes asset allocation, and suggested that intelligent investors should consider hedge funds and other alternative asset mechanisms.

Overall, Rubenstein was bleak about the political leadership here and in Europe, and does not expect much policy leadership between now and next year's election, at least not on the big picture items. He does foresee more modest action on a continuing budget resolution, extension of unemployment benefits, renewal of the payroll tax cut and perhaps some modest Medicare reforms. Such is the perspective of one of our nation's most successful investors, as well as an experienced government policy maker.

Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements.