[fabacad] Recession will be nasty and deep, economist says

  • From: Saif Abrar <saif.abrar@xxxxxxxxxxx>
  • To: Saif Abrar <saif.abrar@xxxxxxxxxxx>
  • Date: Fri, 25 Aug 2006 17:50:58 +0530

Housing is in free fall, pulling the economy down with it, Roubini argues
By Rex Nutting, MarketWatch
Last Update: 4:59 PM ET Aug 23, 2006

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. Read more.

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," 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 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.

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