by Calculated Risk on 1/24/2007 08:02:00 PM

"You were talking about the ugly bears. The reality is that we see a lot of ugly bears growing horns and becoming bulls."
Jacob Frenkel, vice chairman of insurer AIG, to Nouriel Roubini, Jan 24, 2007

From AP on the World Economic Forum in Davos, Switzerland: Experts Ponder Impact of U.S. Slowdown

The majority of panel members at the major economic session on the opening day of the World Economic Forum's annual meeting predicted a soft landing ...

Laura Tyson, a professor at the University of California at Berkeley who was Clinton's top economic adviser, agreed, saying "there are some reasons to be very optimistic for the coming year."

Looking at projections for 2007, she said, there is "an amazing similarity of predicted growth rates for the U.S., Europe and Japan, between 2 and 2 1/4 percent _ a result of the European and Japanese economies picking up and the slowdown in the United States."

Financial markets are not as volatile as they were because of a long-run positive trend in output and interest rates, she said.

Tyson added that the global economy has diversified to the point that it no longer is "dependent on a single locomotive, the United States."

Emerging markets have also been growing and expanding to account for more than half of the world economy, she said.

"All of those things to my mind suggest another Goldilocks year," Tyson said, adding that "it'll look different from the last Goldilocks year."

For the lone bear at Davos' views, see Roubini's First Day in Davos: 2007 Global Economic Outlook

I was the only one who expressed some concerns about a US hard landing that could take the form of a growth recession or an outright recession ...

The consensus, clear at the panel, was for another Goldilocks year for the US and global economy with the US achieving a soft landing.

Roubini suggests:

... housing is only 6% of GDP while consumption is 70% ... So any hard landing – whether a growth recession or an outright recession – will require a sharp slowdown of consumption growth. I do believe that the next leg of the US slowdown, that will lead at least to a growth recession, will be the consumer weakened by a variety of factors:

- The job losses in housing and manufacturing will build up over 2007 and reduce job growth from 150k jobs to about 50k jobs per month over the next few months. So, labor slack will reduce income generation.

- The negative wealth effects of falling housing values and falling mortgage equity withdrawal will slow down consumption as households with negative savings have been using their homes as their ATM machine for too long.

- Rising reset interest rates on monster mortgages, ARMs and subprime loans will increase debt servicing ratios.

- The coming credit crunch in the subprime sector will serious hurt subprime and other ARM borrowers.

So, while the US consumer will be the last shoe to drop it will drop this year as the consumer is at its tipping point in spite of the recent temporary factors that have boosted its consumption. So I do not believe that the economy will achieve the soft landing predicted by the economic consensus as the balance of risks and vulnerabilities suggests further economic weakness ahead.

One more comment from Frankel:

"I'm optimistic but not sanguine."

Say what? I think the AP writer missed something.