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U.S. economy struggling but not sliding into recession, KeyCorp analyst says

The U.S. economy is facing some struggles but doesn’t appear at risk of falling into a recession, said Bruce McCain, who tracks the economy for the wealth management division of KeyCorp.

“We do not see strong indications of it,” said McCain, chief investment strategist for Cleveland-based Key Private Bank. “It’s been slipping toward that level where we might become concerned, but we’ve got enough room that we don’t think at this point there’s a strong probability of recession in the United States.”

McCain, who visited Buffalo on Thursday, pointed to a few factors affecting the domestic economy: the energy sector, wages and international markets.

On the issue of energy, American motorists are enjoying paying less than $2 a gallon for gasoline. But there is a flip side to the trend, McCain said, and it is taking a toll on U.S. energy producers.

“Over the last year, as oil prices dropped in price, we lost a lot of the benefit that we were getting from energy development and production,” McCain said. “That had become a fairly significant factor in the economy.”

But what about the “gasoline price refund” that consumers get when they spend less to fill up?

“Economists looked at it and said, ‘What we lose in the energy patch, we’ll make up with consumer spending,’ ” McCain said. “And that doesn’t seem to have occurred. There are some arguments about just how much of that money may have been spent.”

McCain said households are coping with costs such as health care, college tuition and food rising at faster than the rate of inflation, and much faster than income growth. As a result, he said, households are more cautious about their spending. But average wages could start to rise, based on developments in the labor market, he said.

“As labor becomes somewhat shorter in supply, if wages can pick up and along with that the confidence that people are not as much of a risk of layoff, it clearly will accrue to the benefit of not only income, but the willingness to spend a little bit more liberally,” he said.

“When Walmart raises wages, you’re probably getting to the point that there’s some shortage or at least growing shortage of (labor)supply.”

McCain is keeping an eye on overseas markets, which he said are “slipping closer to a recessionary environment, or at least a slowdown, than we are.”

The U.S. manufacturing sector is “reasonably healthy,” he said. A strong dollar makes things tougher for their exports, since their goods are more expensive for their international customers to buy, although the dollar has fallen this week.

“We’re doing a good job of finding ways to compete,” McCain said. “Clearly it’s difficult because the competition has been so much more severe.”

McCain will keep an eye on production statistics for clues about where the economy might be headed.

“We need to see at least modest expansion on the production side of the economy and continued support on the consumer side,” he said. “We need to make sure that consumers remain confident enough to continue growing the economy going forward.”

McCain was in Buffalo for an appearance at the Buffalo Club. He and John Manzella, president of World Trade Center Buffalo Niagara, spoke to Key Private Bank clients about the economy.