Monday, November 12, 2007

Hussman, Roubini: Recession Coming

by Calculated Risk on 11/12/2007 02:37:00 PM

From John Hussman (hat tip Duceswild): Expecting a recession

In recent months, I've repeatedly noted that while recession risks were gradually increasing, there was not sufficient evidence to expect an imminent economic downturn. Most economists still believe this. On Saturday, the consensus of economists surveyed by Blue Chip Economic Indicators indicated expectations that growth will be sluggish into next year, but that there will be no recession. Unfortunately, the economic consensus has never accurately anticipated a recession. For my part, the outlook has changed. I expect that a U.S. economic recession is immediately ahead.
From Nouriel Roubini: The Coming US Consumption Slowdown that Will Trigger an Economy-Wide Hard Landing
Any recession call for the U.S. is clearly dependent on US consumption faltering. Since residential investment is only 5% of even a worsening housing recession cannot – by itself – trigger an economy-wide recession. Rather, since private consumption is over 70% of aggregate demand a sharp and persistent slowdown in consumption growth – below 1% or even negative - is necessary to trigger a full blown recession.

In this regard, evidence is mounting that a debt-burdened and saving-less US consumer – that until recently used its home as an ATM and borrowed against its housing wealth - is now on the ropes and at its tipping point.

... a sharp slowdown in consumption growth will be the last straw that will trigger an economy wide recession. Expect Q4 growth to be 1% or below and this growth further to accelerate into negative territory by H1 of 2008.
And Roubini on the housing wealth effect:
... there is the wealth effect of falling home values. Estimates of such a wealth effect range in between 5% and 7% of the change in wealth ... The total wealth effect of housing on consumption also depends on how much home values will fall. Current estimates range between a consensus of at least 10% price fall, some suggesting a 15% fall and some – like myself and others – arguing that home prices will fall 20% or more. According to Fed data, the market value of the US residential housing stock was $21.0 trillion at the end of the second quarter of 2007. Thus, the fall in housing wealth could be in the $2 trillion (for a 10% drop in home prices) to $4 trillion range (for a 20% drop in prices). At $2 trillion and with a 5% effect one gets a fall in real consumption of $100 billion; with $4 trillion and with a 7% effect you get a fall in consumption of $280 billion.
I'll get back to Roubini's discussion of the impact of home equity withdrawal on consumer spending.

Note that Roubini has been pretty bearish for some time, but I believe this is a new position for John Hussman.