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Sunday, August 27, 2006

Market Watch: RECESSION WILL BE NASTY AND DEEP



Housing is in a free fall and is pulling the economy down with it, Roubini says

WASHINGTON (MarjetWatch)---The United States is headed for a recession that will be "much nastier, deeper and more protratced" than the 2001 recession, says Nouri Roubini, president of Roubini Global Economics.

MarketWatch
By: Rex Nutting
August 23, 2006

Writing on his blog Wednesday, Roubini repeated his call that the U.S. would be in a recession in 2007, arguing that the collapse of housing will 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 year-over-year.

"This is the biggest housing slump in the last 4-5 decades; every housing indicator is in a free fall, including housing prices," Roubini said. 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 bubble will effect 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 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 the imbalance 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 $200B 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.

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