UPDATE 4-Buffett says U.S. in recession, stocks not cheap

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By Jonathan Stempel

NEW YORK, March 3 (Reuters) - Billionaire investor Warren Buffett said on Monday the U.S. economy is in recession, and that stocks are "not cheap" despite recent declines.

Buffett also said he is no longer offering to guarantee $800 billion of municipal bonds backed by MBIA Inc (MBI.N), Ambac Financial Group Inc (ABK.N) and FGIC Corp, three large bond insurers.

Speaking on CNBC television, Buffett said the economy is heading south even though gross domestic product has not yet fallen for two straight quarters, a definition many economists use to identify when a recession begins.

Buffett said slowing economic conditions are also hurting his Berkshire Hathaway Inc (BRKa.N) (BRKb.N) insurance and investment company, whose 76 operating units sell such things as insurance, carpeting, ice cream, paint and underwear.

"By any common sense definition, we are in a recession," Buffett said. "Business is slowing down. We have retail stores in candy, home furnishings and jewelry. Across the board, I'm seeing a significant slowdown."

Last week the Commerce Department said U.S. GDP rose at a 0.6 percent annual rate in the fourth quarter.

Buffett said economic conditions have not deteriorated to levels in 1973 and 1974, a deep recession also marked by rising oil prices and falling stocks.

The 1970s were also a period of rising inflation and unemployment, which together with recession creates "stagflation." Buffett said Federal Reserve Chairman Ben Bernanke has a "very tough balancing act" in trying to boost economic growth without rekindling inflation.

"In '73 and '74, we had this stagflation situation, and we really had a meltdown in equity prices," Buffett said. "We are seeing more fixed-income type forced liquidations. We are seeing more indigestion at banks with a lot of loans they don't want to have. So you're seeing a time of easy money in terms of price, but not so easy money in terms of availability."

While Buffett said he might buy more downtrodden stocks, he's also looking at bond investments that could rise.

"At 1300-plus on the S&P, stocks are not cheap," Buffett said, referring to the Standard & Poor's 500 index .SPX, which has fallen about 16 percent since mid-October.

"I find more things to look at now than I did six months or a year ago, but I would say it's changed more dramatically in the fixed-income market than it has in the equity market," he added. "That may be where I find the opportunities."

Berkshire last year spent $19.11 billion on stocks and $13.39 billion on bonds.

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