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U.S. Economy Stuck in Second Gear: David Levy

The U.S. economy may have managed to avoid going over the fiscal cliff, but fiscal debates still loom ahead and risks to the economy are skewed to the downside in 2013. Or so forecasts David Levy, the chairman of the Jerome Levy Forecasting Center.

Levy recently published his outlook for the new year, in which he argues the U.S. economy is “stuck in second gear, unable to accelerate but not plunging off a cliff.” According to Levy’s outlook, we can expect more of the same economic trends we saw in 2012: slow uneven growth, steady core inflation, and employment gains that continue, but not fast enough to really heal the labor market.

Related: Economy Adds 155K Jobs in December: It’s a ‘Slow and Steady’ Recovery

“We’re in what we’ve referred to over the last several years as a contained depression,” Levy tells The Daily Ticker. “We’re going through a long-term adjustment in balance sheets. Debt levels are coming down slowly, and during that period the economy tends to under-perform. It can’t generate profits through private wealth creation, because we’re not creating wealth. Instead we depend on government deficits. So it’s a healing process.”

In this environment, Levy expects a flat trend in corporate earnings. And he expects treasury yields, which saw record lows in 2012, to ultimately go even lower. Levy says when the economy stumbles, he expects the 10-year treasury yield to ultimately break 1%, though it may not happen this year. Levy believes treasurys are a good investment for long-term holders who want to be safe and are willing to ride out some turbulence.

Looking at international headwinds, Levy says it’s hard to forecast their exact direction.

“China is picking up a little bit, but it’s not the old-fashioned miracle,” he says. “It’s more about the government pumping money in...how hard does the new government push?”

The World Bank and private sector forecasters expect China to grow 7.5 percent growth this year, the Associated Press reports, making it China's weakest performance since the 1990s.

Related: Top Risks to Global Markets in 2013: Eurasia Group

Levy sees emerging markets generally uneven but getting worse, and Europe dealing with the realization that deficits have been getting even larger. What European policymakers do, he says, is yet another question.

One global wildcard Levy picks out, which could surprise to the upside is Japan.

The Japanese cabinet on Friday approved a fresh stimulus package of more than $224 billion, and Prime Minister Shinzo Abe has been pressuring the Bank of Japan to undergo unlimited monetary easing.

Levy's view on Japan is in contrast to analysts such as Peter Schiff, CEO of Euro Pacific Precious Metals, who told The Daily Ticker Japan “actually need a stronger yen, higher interest rates.”

Related: "Obscene Stimulus" Will Trigger 'Made in Japan' Crisis in 2013: Mauldin

“They need to allow their economy to restructure,” says Schiff, “To shrink government. Instead they’re simply going to do more of what’s been failing for the past two decades.”