Nouriel Roubini Forecasts Recession

RGE - Google News Barometer on Recession and Stagflation Risks...and A Few Simple Questions to Chairman Bernanke...: It is hard to predict with certainty whether the U.S. and global economy will suffer of serious stagflation or even a recession (my bearish views are fleshed out in my recent blogs here and here). I have been arguing that those risks are large and rising; and I have recently argued that the probability of a US recession in 2007 is, in my view, as high as 50%. In brief, the Three Bears of high oil prices, rising inflation leading to higher policy rates, and a slumping housing markets will derail the Goldilocks (of high growth and low inflation) and trigger a sharp U.S. slowdown in 2006, that may turn into a recession in 2007.

One potential barometer of such recession concerns - with all the appropriate caveats - is how many news articles are citing terms such as stagflation, U.S. recession, or recession in general.... [I]t is not just obscure publications that are worrying about stagflation and recession. Recent detailed discussions of such risks were recently front page on the WSJ and on Bloomberg. And the number of private sector folks, experts and academics talking about such risks is rising. The authoritative Mike Mussa, former Chief Economist at the IMF, now puts the odds of a US recession at 25-30% while the Fed's own internal yield curve model now predicts that the probability of a U.S. recession in 2007 is almost 40%. As the proverb says, talk is cheap (if so sweet) but in this case the evidence that many folks and leading media publications are increasingly and systematically talking about recession and stagflation to the tune of 1000s of recent articles and commentaries should be at least a signal, to policy makers and market folks, that these risks may be rising (and the talk is no sweet).

Fed Chairman Bernanke is downplaying the risks of a recessions but many out there are starting to worry about it a lot. The Fed may also want to learn from its previous serious forecasting mistakes. In 2000, it took six months for the U.S. to go from overheating into outright recession: in Q2 of 2000 the economy was growing at an annualized rate of over 5% and it slowed down to close to 0% by Q4 and entered into an outright recession by Q1 of 2001. As late as September 2000, Fed discussions - see their Minutes - were showing the FOMC being mostly clueless about the upcoming recession and still worrying more about the alleged rising inflation (with their view of the balance of risks stressing rising inflation rather than slowing growth). It then took a suprising and lousy Chrismas season of sales and a crashing Nasdaq at the beginning of the new year session on January 2nd 2001 to get the Fed into reality check, panic mode and start reducing the Fed Funds rate at an exceptional inter-FOMC meeting point.

And in 2000, the triggers for the recession were suprisingly similar to 2006: then a tech sector investment bust (now a real estate sector bust); then a Fed tigthening of 175bps (between June 1999 and June 2000), now a 425bps (soon 450bps) tigthening; then a modest oil shock (with oil rising from low teens to high teens in 2000 on the basis of Mid-East tensions and the beginning of the second intifada), now oil rising from $ 20 to 40 to 60 to 75 (and soon enough to 80) on the wave of much more serious Mid-East tensions (Israel conflict with Palestinians and Lebanon, growing security mess in Iraq, rising risks of a confrontation with Iran on the nuclear proliferation issue); then, there were worries - mostly unfounded in reality - on the risks of rising inflation, while now there are much more serious real worries (in spite of Bernanke's latest flip-flop on the issue, to cite Steve Roach today) on a truly rising inflation rate (see also WSJ's Greg Ip on Bernanke keep on saying one thing and doing another for the last few months; so much for Fed transparency and consistency of its communication strategy).

So, why does Bernanke believe that a "U.S. recession is not likely?" Why are things better now than in 2000 when all indicators show similar vulnerabilities but only more severe and scary ones now than in 2000?...

Comments

[kharris]

Straw man alert. Fed officials never say the risk of recession is high.

Fed officials only talk about recession when they have commenced pulling us out of it. At that point, NBER has usually not gotten around to saying there is a recession, so it's still OK to say you don't know. Asking why Bernanke doesn't say there is a substantial risk of recession is like asking why the White House keeps talking about how well things are going in Iraq.

[anne]

Also, there is always a risk of recession during an extended Federal Reserve tightening sequence but the resistence to recession of developed economies through this period of rising energy prices and variously faltering housing markets suggests the risk may be moderate to low. The American real estate market in general is remarkably robust, and low long term interest rates are encouraging.

[anne]

http://flagship2.vanguard.com/VGApp/hnw/FundsByName

Vanguard Fund Returns
12/31/05 to 7/26/06

S&P Index is 2.6
Large Cap Growth Index is -3.4
Large Cap Value Index is 8.4

Mid Cap Index is 1.3

Small Cap Index is 2.6
Small Cap Value Index is 5.9

Europe Index is 12.8
Pacific Index is -0.9
Emerging Markets Index is 5.5

Energy is 16.9
Health Care is 7.0
Precious Metals is 21.0
REIT Index is 16.6

High Yield Corporate Bond Fund is 1.6
Long Term Corporate Bond Fund is -4.1

[anne]

http://flagship2.vanguard.com/VGApp/hnw/FundsVIPERByName

Sector Stock Indexes
12/31/05 - 7/26/06

Energy 16.0
Financials 5.2
Health Care 1.1
Info Tech -9.7
Materials 2.9
REITs 16.6
Telecoms 14.3
Utilities 10.8

[anne]

What is noticeable in investing is that the market has favored defensive or value stocks through this tightening sequence, and long term bonds have held well. International developed country stock markets are robust, and long term interest rates relatively low.

[Bruce Ferguson]

August.
Although long-term prospects for productivity growth and the economy remain favorable, the Committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future.
http://www.federalreserve.gov/boarddocs/press/general/2001/20010821/

Sept.
The Federal Open Market Committee decided today to lower its target for the federal funds rate by 50 basis points to 3 percent. In a related action, the Board of Governors approved a 50 basis point reduction in the discount rate to 2-1/2 percent. The Federal Reserve will continue to supply unusually large volumes of liquidity to the financial markets, as needed, until more normal market functioning is restored. As a consequence, the FOMC recognizes that the actual federal funds rate may be below its target on occasion in these unusual circumstances.
http://www.federalreserve.gov/boarddocs/press/general/2001/20010917/

[wkwillis]

The Fed raised interest rates to crush the Clinton economy and make sure that Gore didn't get elected. Then they lowered interest rates after the fix was in to bail our George Bush Jr. And they kept lowering interest rates for the next six years. Interest rates are now strongly negative compared to wholesale price inflation.
Why pay attention to their excuses?