Nouriel Roubini : The U.S. will experience its most severe recession since WWII

[RedEarth]

Nouriel Roubini | Nov 11, 2008
Here is a below brief summary of many of the points that I have made for the last few months on the outlook for the U.S. and global economy and for financial markets:


The U.S. will experience its most severe recession since WWII, much worse and longer and deeper than even the 1974-75 and 1980-82 recessions. The recession will continue until at least the end of 2009 for a cumulative GDP drop of over 4%; the unemployment rate will likely reach 9%. The US consumer is shopped out saving less and debt burdened and now faltering: this will be the worst consumer recession in decades.

The prospect of a short and shallow 6-8 months V-shaped recession is out of the window; a U-shaped 18-24 months recession is now a certainty and the probability of a worse multi-year L-shaped recession (as in Japan in the 1990s) is still small but rising. Even if the economy were to exit a recession by the end of 2009 the recovery could be so weak because of the impairment of the financial system and of the credit mechanism (i.e. a growth rate of 1-1.5% for a while well below the potential of 2.5-2.75%) that it may feel like a recession even if the economy is technically out of the recession.

Obama will inherit and economic and financial mess worse than anything the U.S. has faced in decades: the most severe recession in 50 years; the worst financial and banking crisis since the Great Depression; a ballooning fiscal deficit that may be as high as a trillion dollar in 2009 and 2010; a huge current account deficit; a financial system that is in a severe crisis and where deleveraging is still occurring at a very rapid pace, thus causing a worsening of the credit crunch; a household sector where millions of households are insolvent, into negative equity territory and on the verge of losing their homes; a serious risk of deflation as the slack in goods, labor and commodity markets becomes deeper; the risk that we will end in a deflationary liquidity trap as the Fed is fast approaching the zero-bound constraint for the Fed Funds rate; the risk of a severe debt deflation as the real value of nominal liabilities will rise given price deflation while the value of financial assets is still plunging.

The world economy will experience a severe recession: output will sharply contract in the Eurozone, UK and the rest of Europe, in Canada, Japan, and Australia/New Zealand; there is also a risk of a hard landing in emerging market economies. Expect global growth – at market prices – to be close to zero in Q3 and negative by Q4. Leaving aside the effects of the fiscal stimulus China could face a hard landing growth rate of 6% in 2009. The global recession will continue through most of 2009.

The advanced economies will face stag-deflation (stagnation/recession and deflation) rather than stagflation as slack in goods markets, slack in labor markets and slack in commodity markets will lead advanced economies inflation rates to become below 1% by 2009.

Expect a few advanced economies (certainly US and Japan and possibly others) to reach the zero-bound constraint for policy rates by early 2009. With deflation on the horizon a zero-bound on interest rates implies the risk of a liquidity trap where money and bonds become perfectly substitutable, where real interest rates become high and rising thus further pushing down aggregate demand, and where money market funds returns cannot even cover their management costs. Deflation also implies a debt deflation where the real value of nominal debts is rising thus increasing the real burden of such debts. Monetary policy easing will become more aggressive in other advanced economies – even if the ECB will cut too little too late - but monetary policy easing will be little effective as it will be pushing on a string given the glut of global aggregate supply relative to demand and given a very severe credit crunch.

For 2009 the consensus estimates for earnings are delusional: current consensus estimates are that S&P 500 earnings per share (EPS) will be $90 in 2009 up 15% from 2008. Such estimates are outright silly and delusional. If EPS fall – as most likely – to a level of $60 then with a multiple (P/E ratio) of 12 the S&P500 index could fall to 720, i.e. about 20% below current levels; if the P/E falls to 10 – as possible in a severe recession, the S&P could be down to 600 or 35% below current levels. And in a very severe recession one cannot exclude that the EPS could fall as low as $50 in 2009 dragging the S&P500 index to as low as 500. So, even based on fundamentals and valuations, there are significant downside risks to U.S. equities (20% to 40%). Similar arguments can be made for global equities: a severe global recession implies further downside risks to global equities of the order of 20-30%.Thus, the recent rally in US and global equities was only a bear market sucker’s rally that is already fizzling out buried under a mountain of awful worse than expected macro, earnings and financial news.

http://www.rgemonitor.com/blog/roubini/254354/the_dismal_outlook_for_the_us_and_global_economy_and_the_financial_markets


......see related post here.......

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=103x400756

[GliderGuider]

1. The problem with Nouriel Roubini is

He's a flaming Pollyanna optimist. Even Roubini, the doomer's doomer of economists, isn't calling it like it really is.

Oh, he's right as far as he goes of course, but when he talks about recessions he doesn't stray nearly far enough off the reservation. His horizons are resolutely bounded by pure concerns of finance and economics, and fail to factor in some significant biophysical aspects of the world situation.

IMO he utterly fails to take into account the rapidly worsening global energy situation (aka Peak Oil) and the consequences that the draining of the financial capital pool will have for our ability to bring oil alternatives on-line in time. Without oil or a substitute, economic activity will be constrained by both financial and energy shortages. Most energy substitutes that have the scalability to meet the challenge (e.g. a switch to electric cars and electric rail) require capital to fund the infrastructure build-out, and could even result in a worsening of global warming if we switch to coal to replace declining oil supplies. We have at most 5 years to address this situation, and at this time there aren't even any coherent plans in place.

Then there's the global food situation that is being exacerbated by climate change (which is causing worsening droughts and floods), the rising cost of fertilizer and the depletion of irrigation water. The global economic recession will have amplifying consequences for regional food shortages, since lower economic activity and the implosion of global credit markets will have a braking effect on donations for international food aid. This is already happening to Zimbabwe. If a region's food supply declines, so does its economic capacity, as an underfed workforce is much less productive. That in turn makes the recession or depression worse.

All these factors will work together over the next two to five years, and the interaction has the potential of creating a level of global distress that is an order of magnitude worse than a simple recession, no matter whether it looks like a V, a U or an L.

This is a serious shitstorm we're facing, and Roubini, as pessimistic as he is, doesn't come close to laying out how bad it could get.

[Ghost Dog]

2. Plus, the perilously poisoned planet,

and the prospect of, "technologically advanced" and "ideologically crazed", propaganda-assisted, total war.

:(

Edit: Forget the usual (latin) alphabet. Think "backslash": \.

[BadGimp]

6. you make me wanna up my meds

[GliderGuider]

8. I worry about saying things like that

I know this kind of talk is shocking to a lot of people. However, when I see people being advised that they need to fill sandbags when I'm pretty sure they need to be building an Ark, I feel compelled to speak up. What Roubini is recommending is the filling of sandbags.

I've been watching this tsunami build for the last four years, and my web site now has 3 dozen articles I've written on various aspects of it. I've now stopped analyzing the myriad ways the whole thing could come apart, because it's just too damned depressing, and despair is not useful. I do think there is an avenue we should be following, but it's got nothing to do with trying to fix what is at its core an un-fixable predicament.

[Ghost Dog]

9. This, for example, helps?

http://www.youtube.com/watch?v=ADgTJ_yKS9U ("Rise", The Frames).

[KDTV]

3. Not good

I hope his prediction is way off.

[Roland99]

4. He's been rather spot on for about a year at least

[BelgianMadCow]

5. Phew. Trying to digest...

Deflation really is a much more ugly beast than inflation...

[bertman]

7. Roubini's analysis sounds like the one Paul Krugman gave on Fresh Air a few weeks ago.

He stated unequivocally that the U.S. economy is still strong enough to keep another depression at bay, and it WILL rebound. He also said that the recession is going to get worse before it gets better and that unemployment will hit 8% (can't be that far from there at this moment).

He was very specific that this is a Bush Administration-generated problem and listed a number of things the Bushies have done that are screwing up the effort to get our economy and governmental functions back on track. For example, the purging of career professionals from government service in favor of political hacks.