Posted on 08/25/2006 12:45:28 PM PDT by Toddsterpatriot
WASHINGTON (MarketWatch) -- The United States is headed for a recession that will be "much nastier, deeper and more protracted" than the 2001 recession, says Nouriel Roubini, president of Roubini Global Economics.
Writing on his blog Wednesday, Roubini repeated his call that the U.S. would be in recession in 2007, arguing that the collapse of housing would bring down the rest of the economy.
Roubini wrote after the National Association of Realtors reported Wednesday that sales of existing homes fell 4.1% in July, while inventories soared to a 13-year high and prices flattened out on a year-over-year basis.
'This is the biggest housing slump in the last four or five decades: every housing indicator is in free fall, including now housing prices.'
The decline in investment in the housing sector will exceed the drop in investment when the Nasdaq collapsed in 2000 and 2001, he said.
And the impact of the bursting of the bubble will affect every household in America, not just the few people who owned significant shares in technology companies during the dot-com boom, he said. Prices are falling even in the Midwest, which never experienced a bubble, "a scary signal" of how much pain the drop in household wealth could cause.
Roubini is a professor of economics at New York University and was a senior economist in the White House and the Treasury Department in the late 1990s. His firm focuses largely on global macroeconomics.
While many economists share Roubini's concerns about imbalances in the global economy and in the U.S. housing sector, he stands nearly alone in predicting a recession next year.
Fed watcher Tim Duy called Roubini the "the current archetypical Eeyore," responding to a comment Dallas Fed President Richard Fisher made last week in referring to economic pessimists as "Eeyores," after Winnie the Pooh's grumpy friend.
"By itself this slump is enough to trigger a U.S. recession: its effects on real residential investment, wealth and consumption, and employment will be more severe than the tech bust that triggered the 2001 recession," Roubini said.
Housing has accounted, directly and indirectly, for about 30% of employment growth during this expansion, including employment in retail and in manufacturing producing consumer goods, he said.
In the past year, consumers spent about $200 billion of the money they pulled out of their home equity, he estimated. Already, sales of consumer durables such as cars and furniture have weakened.
"As the housing sector slumps, the job and income and wage losses in housing will percolate throughout the economy," Roubini said.
Consumers also face high energy prices, higher interest rates, stagnant wages, negative savings and high debt levels, he noted.
"This is the tipping point for the U.S. consumer and the effects will be ugly," he said. "Expect the great recession of 2007 to be much nastier, deeper and more protracted than the 2001 recession."
He also sees many of the same warning signs in other economies, including some in Europe.
Rex Nutting is Washington bureau chief of MarketWatch.
There are "wealth effects" associated with higher interest rates themselves, assuming your assets are allocated in a manner to benefit from them.
When Carter was President I sensed that troubled economic times were coming and paid down as much of my debt as possible and came out of it pretty good. Warned my co-workers that they should do the same. Some of them made a lot of money with the high interest rates and some lost almost all they had.
It was a rough time for a lot of people but you are right. We did survive it.
I'm not an economist and probably wrong but I just don't see those days ahead of us at the present time.
Dims can wail all they want in 2006 and 2008 but this old guy is still going to vote Republican. I figure about 2 more election losses by the Dims and some of them will be jumping off tall building in frustration and I want to be around to see it.
The Federal Reserve Bank of New York is a good enough resource for me.
Federal Reserve Bank of New York
Fed Funds Rate Aug 1986 was 5 7/8 - Dec 1987 was 9 3/4.
1997 is more complex. In the face of disinflationary Federal Budget surpluses the Fed tightened to HOLD RATES UP. Recall that Chmn. Greenspan made the "irrational exuberance" speech in Dec. 1986. Reading the Annual Report of the Fed for 1997, one can see that, even though Fed Funds stayed in a range of 5 1/4 to 5 1/2, reserves declined approximately 30% during the year.
Both circumstances are evidence of Fed tightening.
Thanks for the link.
Fed Funds Rate Aug 1986 was 5 7/8 - Dec 1987 was 9 3/4.
You misread, Aug 1986 was 5 7/8, Sept 1987 was 7 1/4. Not much of a tightening cycle. The Dow managed to rise 46% over that period.
Reading the Annual Report of the Fed for 1997, one can see that, even though Fed Funds stayed in a range of 5 1/4 to 5 1/2, reserves declined approximately 30% during the year.
I couldn't find that report. Link?
Yes, I did - should have been December 1988, an extension of the same tightening cycle.
Believe me when I tell you I remember 1987 as if it was yesterday. As I recall, having served as a Merrill Lynch Account Executive throughout the '80s, the DOW declined approx. 11% between December 86 and March 87, resumed its uptrend to a peak in July (at a backward P/E approaching 28x), fooled around in August and September, then entered the crash of October.
The Bond market began its collapse in the Spring of 1987. Within mere days after the May treasury auction the price bid for newly-issued bonds had declined more than 10% from the par issue value. I recall a ML trader noting over the Squawk Box late one afternoon in September that "retail clients are hitting the bit on the 30-year (Treasury Bond) at 10%." That is, the bond market had entered a steep decline, and individuals were selling their bonds in a panic (and that we should buy from the suckers).
After the truly alarming action of the 4th quarter 1987 - including the 22% decline of Oct 19th - corporate profits continued to rise, and the market steadily rose until the summer of 1990.
A downloadable copy of the 1997 Annual reort can be found here
The chart of reserve balances throughout 1997 is on the bottom of page 5.
As the old saying goes, economists have predicted 21 of the last 2 recessions.
Your source had a small math error. In December 1988, Fed Funds hit 8 3/4, not 9 3/4. So you blame the Crash on the tightening cycle? I didn't realize a 1 3/8 rise in Fed Funds can cause a 22% drop in the Dow. How much should a 4 1/4 rise make the Dow fall?
The chart of reserve balances throughout 1997 is on the bottom of page 5.
Thanks. That doesn't look like a 30% drop, maybe 10%. Now how is a 10% drop in required reserve balances to blame for the collapse of LTCM?
And if a drop from $60 billion to maybe $54 billion in 1997 is bad, the $20 billion in total balance requirements at the end of 2004 must be a total disaster.
Bingo
+
The Fed will not lose to inflation - it will keep raising its target rate until it gets ahead of perceived inflation - and at the margin something will break.
The doom-sayers' bet is, somewhere, sometime soon, a major institution will not be able to roll over its short-term borrowing line and will become "frozen." Looking back we will call that a "crisis."
Will it be Ford? Fannie Mae or Freddie Mac? A private mortgage lender? An insurer or re-insurer unable to settle claims after the next natural disaster? Gasoline at $4.00 in the Midwest?
Will some emerging nation nationalize energy or basic materials industry or default on external debt? Hedge funds chain-fail? Consumer mortgage borrowers who have some sort of floating rate loan or who have borrowed all the available equity against an unrealistic appraisal declare bankruptcy? Who knows?
The world will go on. Markets will recover. But ill-prepared investors and over-leveraged borrowers will make bad decisions out of fear and desperation. Better to be safer and more liquid and have nothing happen than to be on the wrong side of an overly aggressive portfolio.
Hilarious!!
Looking back we will call that a "crisis."
It's nice to be able to look at a crisis and blame a Fed tightening cycle. Not always correct, but nice. And funny! Like I said in post #57.
“You know it’s said that an economist is the only professional who sees something working in practice and then seriously wonders if it works in theory.” —Ronald Reagan
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