Roubini predicts a US recession in 2007
A couple of days ago I used the June labour market data to question whether the US economy in fact is losing momentum. Based on the same data Nouriel Roubini from RGE also narrated this data negatively by invoking the idea of stagflation lite.
'Today’s employment report is consistent with my Stagflation-Lite call for the U.S. economy: job creation was well below expectations and pretty dismal in absolute terms (121,000 in June and only 108,000 average per month in Q2); three months in a row of sub-standard employment growth are consistent with my call of a Q2 growth rate of 2.5% (and falling further in H2) rather than the consensus of 3%. And with wages (hourly earnings) growing faster than expected. (3.9% on a year-on-year basis) and the unemployment rate remaining low, the Fed will have to continue to worry about inflationary pressures building up in the economy as both labor markets and oil (today flirting with a $76 new record level) are indicating higher inflation.'
'I have so far been somehow cautious in my bearish call for the U.S. economy. My pessimistic views have been far from the consensus of a 3.5% US growth moderating to 3% in H2: I have argued that the U.S. will slow down to an annualized growth rate of 2% by Q4 of this year. This is certainly a negative outlook for the U.S. and global economy (given my arguments against "decoupling") and for the markets; but it was not a recession call.
I am now revising my view by assigning a larger probability to a U.S. recession in 2007. Until now I believed that a growth recession - i.e. growth of 2% - was the most likely scenario for the U.S. next year. But recent developments suggest to me that the probablity of an outright recession - or a stagflation-lite where output actually drops rather than slows down - are now, in my subjective view, as high as 50%.'
So what should we think of Roubini's crisis mongering here? The easy and comfortable position is obviously take on a 'wait-and-see' position; i.e. let us see a bit more before we conclude anything. Roubini's predictions are vested in the assumption of continuing rate hikes by the Fed to wave off inflation. Rising oil prices (i.e. stagflation lite) and a slump in the housing market are among the important ingredients in Roubini's scenario as well rising geopolitical tensions ... this leads Roubini to conclude the following ...
'The risks of a U.S. recession are now seriously increasing and the burden of proof, at this point, is now on the Panglossians who still believe that the U.S. can absorb all the shocks that are buffeting it with limited growth effects. So, I look forward to hearing sensible arguments on why Goldilocks will successfully repel the Three Ugly Angry Bears.'
So that is Roubini's position, what is yours?