Nouriel Roubini's Global EconoMonitor

Archive for April, 2007

  • New Paper on Home Equity Withdrawal, Wealth Effects and Consumption

    Christian Menegatti and this blogger have just published a new paper on the effects of home equity withdrawal (HEW) and housing wealth on consumption. The paper is titled “The Direct Link Between Housing and Consumption: Wealth Effect and Home Equity Withdrawal” and is available to RGE’s paid premium subscribers. The main results of the paper […]

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  • U.S. Q2 Growth Likely to Be Worse than the Weak One in Q1

    Earlier this week (4/24) the analysis of the preliminary data for Q2 led this blog to the following conclusion:

    “These data and trends are all consistent with the view that the growth slowdown in Q1 – likely to be sharply down relative to the already weak Q4 – will persist and get worse in the current Q2 quarter. Q1 will turn out not to be the bottom of the growth slowdown (as argued by the consensus); Q2 looks – based on current data – on a trajectory to show an even worse growth rate than Q1. Thus, the chances of a U.S. hard landing are clearly increasing.”

    The results of Q1 (a weak 1.3% growth) came as no surprise to this blogger nor to many other macro forecasters. Indeed, while the consensus was for 1.8% a firm such as Goldman Sachs was predicting 1.2% and even the bullish JPMorgan predicted 1.5% for Q1. 

    At this point the issue is not anymore about Q1 and who got it right but what comes next as we are one third of the way into Q2. The points made by this blogger earlier this week and before, that the deceleration of US economic growth will continue into Q2 and beyond and will lead to a hard landing in 2007, remain.

    Currently the most sophisticated “soft landing” commentators do recognize that Q1 was weak – hard to deny it given the fact of a near growth recession 1.3% – but then argue that Q1 will turn out to be the bottom of the US growth deceleration with a recovery  of the economy in Q2 and H2. The economy may well turn out to surprise on the upside if there is a recovery of corporate capex and a resilience of the US consumer. But actual and forward looking data suggest that the growth deceleration is continuing in Q2 and that Q2 – as argued extensively before in this blog – will turn out worse than Q1.  Thus the risk of a hard landing is increasing.

    In this regard notice the following important points:

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  • Spillover of Housing Recession to Other Sectors and Industries in the Economy

    Usually this blog analyzes the negative spillovers from the housing recession to the rest of the economy from a macro prospective: i.e. we also got a auto recession, a manufacturing near rececession, a service sector sharp growth slowdown (as the service ISM has fallen from 59 to 52 in two months with “50” being the […]

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  • US economic outlook darkens further: risk of hard landing is increasing

    Today’s set of macro data were quite weak and confirming the increased risk of a U.S. hard landing: – A 8.4% fall in existing home sales in March. These sales are now at their lowest  since June 2003. Single-family sales fell 9.5%; this is  the largest  fall since  January  1989. Also the months of unsold […]

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  • Falling Remittances from the U.S. to Latin America as Evidence of the Housing Slump

    Last week this blog interpreted the mystery of the apparent lack of fall of housing jobs in the official US statistics – in spite of a fall in housing starts of over 30% – as being partly due to layoffs of undocumented and illegal workers in the housing sector.

    As reported today in the Wall Street Journal there is now evidence – coming from research by Walter Molano at BCP Securities – that remittances to Latin America from the U.S. are significantly falling signaling that documented and undocumented workers with families in Latin America are now suffering because of the housing slump. As reported by Molano:

    The rapid slowdown of the U.S. housing sector could have dangerous implications for Latin America and the other emerging market countries that depend on remittances for their balance of payment needs.

    Remittances became important a few years ago, when they began to eclipse other forms of capital flows, such as foreign direct investment, multilateral assistance and loans. In 2005, the World Bank estimated that the total level of money sent home by immigrants from emerging market countries was $223 billion. In 2006, Latin America received $62 billion in remittances, of which 75% was from the U.S. The multilaterals and Latin American governments were ecstatic about the increase in remitted funds. They attributed the inflows to changes in regulatory framework, the proliferation of financial transfer networks and a reduction in transfer costs. Some Central American governments issued long-term bonds, modeling their balance of payments on the steady increase in remitted funds. However, few people bothered to realize that much of the generated money was a result of the large increase in U.S. home construction and associated services. A jaunt around most U.S. construction sites revealed a cacophony of Spanish and Portuguese accents, along with a sea of Latino food vending cars. Latin American electricians, masons, painters, carpenters, plumbers and landscapers thrived as North American homeowners used second mortgages to modernize their dwellings. Unfortunately, everything that goes up must come down—and the decline in the U.S. housing market has dangerous implications for some emerging market countries.  

    A look at the remittance data and U.S. housing starts reveals a worrisome correlation. Regressing panel data provided by the IMF on annual remittances to Latin America against annual U.S. housing starts shows a high degree of correlation between 1997and 2005. The panel data consists of 15 countries, and the correlation was higher than 90% in 12 of the cases. The outlier was Paraguay, which had a negative correlation of .03%. This was not too surprising, given that most Paraguayan immigrants head off to Argentina. Unfortunately, Argentina suffered a severe crisis during the sample years, explaining the massive decline in Paraguayan remittances. Although the conclusions were fascinating, the sample sets had a small N (number of observations). Therefore, we decided to examine another sample set. Banco de Mexico has monthly remittance data through February 2007, and the fit was remarkable. Monthly remittances peaked in May 2006, at the same time that housing starts reached their zenith. However, the decline in remittances is occurring at a faster pace than the drop in housing starts, falling 26% from the peak. This is logical, given that Mexican immigrants will harbor their savings as they see job opportunities evaporate. The implication of these results is that some Latin American countries could see pressure on their current account balances, despite the increase in commodity prices. The contraction in remittances will dampen domestic consumption and hamper GDP growth rates. Countries which are extremely dependent on remittances, such as Mexico, Colombia and the Central American states, could see weaker exchange rates as transfers decline. The problems in the U.S. housing sector could have dire implications for home construction activity in Europe and the Middle East. This could affect emerging market countries in North Africa, as well as Pakistan and the Philippines, which also depend on remittances to cover their balance of payment requirements.



    This is one more piece of strong evidence that official US employment statistics do not properly capture the loss of housing jobs that has accompanied the most severe housing recession in decades.


    How serious is this issue?


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  • Panel on US and EU Economic Outlook at the New York Fed Conference

    Yesterday the New York Fed hosted an excellent conference on the Euro and the Dollar where a wide variety of issues relative to the economic and financial relations between the US and Europe were discussed. Most presentations will soon be available at the conference web site. In the morning the first session was a panel […]

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  • Explaining the Mystery of Why Housing Jobs Have Not Fallen Much…and the Worsening Housing Recession…

    There is a mystery in the U.S. employment figures. Housing starts have fallen over 30% since their peak last year and all other measure of new housing supply (building permits, housing construction, housing completions) have also sharply fallen. But if we take the official employment figures employment in the construction sector – even considering the residential sector one alone – has barely budged downwards in the last six months. How can starts fall 30% plus and employment instead rise in housing construction?

    There are two possible explanations:

    1. Labor hoarding by home builders in expectation of housing recovery.

    2. Mismeasurement of housing employment because of undocumented workers and cash contractors.


    The first argument, presented by Jan Hatzius, the excellent U.S. economist for Goldman Sachs, is that home builders decided not to fire workers when housing starts started to fall last year because they were expecting a housing recovery this year. So they hoarded labor. Then the observed fall in housing construction productivity that we see in the data since 2006 is directly related to this labor hoarding. However, he argues that, if as likely, the recovery of housing does not occur this spring the home builders will have to start laying off such workers. So we will soon see the effects of this on the labor market.

    The second argument, that I have presented before, is that undocumented construction workers (many “illegal” ones) were essential in many housing markets (up to 30% of employment in some of these markets) and these undocumented workers – that are the first ones to be laid off – are not recorded in the official employment statistics, not when they are hired and not when they are fired. The New York Times today has a front page article – titled Housing Slump Takes a Toll on Illegal Immigrants – presenting this case; and the Washington Post had a similar story two months ago. In addition to “undocumented” workers many construction contractors work for “cash” as a way to avoid tax-reporting. Thus, this category of real estate workers is also not well documented in official data. Thus, in this view, real estate employment has already fallen quite sharply (and actual – as opposed to recorded – productivity has not fallen much) but it is not yet recorded in the data. In this view – however – continued downturn in housing will lead home builders to start laying off even recorded workers  after the undocumented ones are mosty out. So we will start to see soon the fall in actual and measured housing employment in the months to come.

    Which one of the two stories is the right one? Let us discuss this issue in more detail as well as analyze the recent evidence and data that the housing recession is getting worse, not bottoming out…


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  • The Banque de France Report on Hedge Funds

    The Banque de France has just published its new thoughtful and interesting Financial Stability Review that is devoted to the topic of hedge funds and their role in financial markets. The Banque has taken a very open approach to this issue by commissioning 13 separate papers/perspectives from leading experts on hedge funds: academics, policy makers, […]

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  • Bloomberg Interview on U.S. Economy Hard Landing

    This blogger was guest of Bloomberg’s TV Market Pulse on Friday. You can find the abridged video of this hour long appearance/interview here at: Roubini, Professor, Expects U.S. Recession, Decline in Housing 

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  • FT vs. WSJ on Wolfowitz

    The Financial Times correctly calls today for World Bank President Wolfowitz to resign. At the same time the Wall Street Journal today defends Wolfowitz and claims he is the victim of an unfair political conspiracy to get rid of him. The Financial Times has it  exactly right: the issue here is not one of Wolfowitz […]

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