August 28, 2006
By Dan Dorfman
The economic weather report grows more threatening by the day. One graphic example: ever since last week's glum tidings on the housing front — notably July's skid in both existing and new home sales — the grim R-word (recession) is popping up with mounting frequency from the economic fraternity.
Among those in that ghoulish chorus is global economist Nouriel Roubini, who, economically, comes across as a frightening combination of Count Dracula, Frankenstein's Monster and Godzilla all wrapped up into one. Guaranteed, he'll scare the daylights out of you if you ask him what he thinks about the economy, unemployment or the stock market.
The Turkish-born skipper of New York-based Roubini Global Economics, an international economic consulting firm, and a professor of economics at New York University tells me: "We're just a few months away, probably in November or December, before we move into a recession."
A recession is generally defined as two quarters in a row of negative gross domestic product growth and that's precisely what our economic bear envisions for the first half of 2007. But we'll feel the pain sooner, he says. Leading up to that recession, he predicts, will be puny GDP growth of only 1.5% in the current quarter and zero growth in the fourth quarter.
For all of next year, Mr. Roubini, in a highly contrary and provocative forecast, projects a GDP decline of 2%, versus a consensus Wall Street expectation of growth of 2.5% to 3%.
In reaction to the recession signs and in an effort to stimulate the economy, he thinks the Fed will be forced to begin cutting rates later this year or, at the latest, in the first quarter of 2007.
Here's his recession rationale:
• A bust in housing, which, he says, is no longer in a slump, but in a freefall.
• Roughly $70-a-barrel oil, which is inflationary and will appreciably curb consumer spending, especially consumer durables like furniture and home appliances.
• The catch-up of excessive credittightening by the Fed — 17 straight increases since June of 2004 — which should begin to meaningfully take its toll over the next 6 to 9 months.
• Falling real wages, adjusted for inflation.
• Negative savings and high debtservice ratios.
His economic outlook, Mr. Roubini observes, spells bad news for the job market, which he believes, will lose at least one million jobs next year. By mid-2007, he figures, the unemployment rate, now at 4.8%, will climb to as high as 6%. In the next few months, he expects job growth, which has been averaging a below-normal 110,000 new creations a month the past four months, to drop to zero.
Given his bleak outlook, Mr. Roubini sees bad days ahead for stock prices. More specifically, he expects the market to begin falling sharply next month, with the S &P 500, between then and June of 2007, plummeting some 15% to 20%.
A combination of recession signals and falling stock prices, as the good professor sees it, will undoubtedly impact mid-term elections and is surely very bad news for Republicans, who, he thinks, could well lose control of Congress because of these developments.
Speaking of the economy, Merrill Lynch's North American economist, David Rosenberg, notes a debate is raging over where we now stand in the business cycle — mid or late? Based on his cyclical-pulse indicator — a barometer that consists of 10 indicators, among them housing starts, the personal savings rate and consumer confidence — he concludes the business expansion is very late in the cycle and pegs the odds of a hard landing at between 40% and 80%.
Interestingly, a Merrill survey of global fund managers finds that 65% of them also believe we're late in the cycle, which is up from 62% in July and 54% in May.
Mr. Rosenberg notes that his indicator, on average, peaks 13 months before the onset of a recession. Right now, it's signaling there are another 8 months to go before this expansion switches to contraction. That's especially noteworthy because the average business cycle over the past 7 decades lasted 65 months and right now we have just entered month number 56. So if this expansion runs out of steam next year, Mr. Rosenberg observes, it seems like April and May of 2007 are now wearing big fat bull's eyes.