Thursday, March 11, 2010

Beware Of A Double-Dip Recession

by Nouriel Roubini

[Note: Roubini dances a bit here by assigning probabilities to various outcomes, so he will be "correct" whatever happens (Hey, he counted whatever happens as a possibility). But, he is a good data hound and does a good job of pointing out the weaknesses currently observable in the data-RW]

A slew of poor economic data over the past two weeks suggests that the U.S. economy is headed for a U-shaped recovery--at best--in 2010. The macro news, including data on consumer confidence, home sales, construction and employment, actually suggests a significant downside risk even to the anemic levels of growth which I forecast for H1 (the first half of the year). The U.S. faces continued challenges in H2--particularly as historic levels of fiscal stimulus fade--and appears far too close to the tipping point of a double-dip recession.

This is not the conventional wisdom. Heated debate continues to rage in the U.S. on whether the economic recovery will be V-shaped (with a rapid return to robust growth above potential), U-shaped (slow anemic, subpar, below trend growth for at least the next two years) or W-shaped (a double-dip recession). The V camp includes distinguished research groups and individuals such as Ed Hyman’s ISI, Larry Meyer’s Macroeconomic Advisors, the research group of JP Morgan, Michael Mussa and others.

The U camp includes--among others--Roubini Global Economics, Goldman Sachs' U.S. economic research group, PIMCO and Ken Rogoff. As early as August 2009 I expressed concern in a Financial Times op-ed about the risk of a double-dip recession, even if my benchmark scenario characterizes the risk of a W as still a low probability event (20% probability) as opposed to a 60% probability for a U-shaped recovery. Others worried about the double-dip risk also include David Rosenberg, Gary Shilling and John Makin.

Ed Hyman and I debated whether the recovery would be U- or V-shaped on a Feb. 22 conference call attended by over 2,200 listeners. Since that call, a slew of new U.S. macro data have come out. They have been almost uniformly poor, if not outright awful. Consumer confidence, based on the Michigan survey, has tanked. On the real estate front, new home sales are collapsing again, existing home sales are also falling sharply and construction activity (both residential and commercial) is sharply down. Durable goods orders are down, and initial claims for unemployment benefits remain stubbornly high (way above the 400,000 mark). Real disposable income for Q4 has been revised downward while real disposable income (before transfers) for January was negative again.

The manufacturing ISM index--while still expanding being above 50--has now fallen a couple of notches, and its production and new orders index levels are falling, too; and global PMIs suggest a loss of momentum in the global economic recovery. Real inventories look unchanged in Q1 relative to Q4; auto sales were at best mediocre; core CPI was falling and core PCE was close to 0%, suggesting anemic demand and economic weakness. Q4 GDP growth was revised upward to 5.9% but most of it (3.9%) was due to inventories; final sales grew at a 1.9% rate while consumption grew at a dismal 1.7% (down from 2.8% in Q3). Q3 growth has been revised from an initial 3.5% to 2.8% to 2.2%, with final sales growing only 1.7%. So, at the time of maximum policy stimulus (H2 of 2009), final sales were growing only at a pathetic 1.8% average rate.

Read the rest here.

No comments:

Post a Comment