Nouriel Roubini's Global EconoMonitor

Archive for May, 2007

  • Q1 Growth Revised Down to 0.6%: We Are Already in a Growth Recession

    As expected US Q1 GDP growth was revised down to 0.6% from its initial estimate of 1.3%;  0.6% was even worse than the consensus forecast of 0.8% and this blogger’s forecast last month of 0.7%. This means that in Q1 of this year the US  was already in a “growth recession”.

    As discussed by many authors – including this blogger – a hard landing can take two forms: a growth recession (i.e. a period when growth is well below potenial and ranging in the 0% to 1% range) or an outright recession (i.e. negative growth). Thus, in Q1 of this year the US entered in a growth recession, and a pretty serious one indeed.

    Of course the consensus today is that Q1 was the bottom of the US growth slowdown and that GDP growth will recover to a level above 2.0-2.5% in Q2 and for the rest of the year. I.e., the consensus is that we are in a temporary soft patch. While some supply side data suggest a stabilization of some sectors of the economy (manufacturing, services, etc.) the key concerns now are the deepening housing recession and whether the US consumer is on the rope. Let us discuss both of them.

    As far as housing is concerned, the housing recession and the credit crunch in the mortgage market are clearly worsening. This writer was the featured speaker the other night at an event organized by one of the top 10 global financial institutions; after I gave my bearish outlook for the US economy and the housing market (in a debate with the chief economist of this firm), the four senior analysts of this bank for the housing sector, the mortgage lender sector and the MBS sector gave their outlook (it is all in public reports available for clients/investors of this firm).

    In brief, their view is that: the housing market is still weakening and  – based on their May survey of traffic – housing sales traffic is close to dead; it would take developers to shut down all new construction for almost a year to get rid of the excess supply of unsold homes; thus, downward home price action may continue for the next two years; the credit crunch in the mortgage market is only at its early stages and the distress and crunch is spreading from sub-prime to Alt-A and near prime mortgages;  the major mortgage lenders have not yet started to get a reality check on how bad their assets are and properly mark them to market; the ABX index (the BBB- tranche) collapsed from near parity down to 60 in the last few months and has now recovered to close a still low 67; but, given how lousy were mortgage originations in 2005 and 2006, deliquencies in subprime will further increase in the next few months and further downward pressure in the ABX indexes may be expected. 

    This writer has been a serious bear on housing for a long time: but after listening to these most sophisticated analysts of housing, mortgage lending and the MBS markets from a top global financial firm my concerns seemed almost not bearish enough. The main message from these analysts and the data is that the housing recession, the subprime carnage and the broader mortgage mess are getting worse, not better; and things will get worse well into 2008. There is no end in sight to the housing recession and we are only in the first innings of the mortgage credit crunch.

    As for private consumption (that is about 70% of GDP) its prospects are now weak and cast a serious shadow for US economic growth in the quarters ahead. Let me elaborate why…

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  • The latest housing data suggest that the housing recession is not bottoming out…

    Analysts who take the view that the worst of the housing recession is behind us took comfort from the news this past week that new home sales in April rose by 16% relative to their March level; also in April the stock on unsold new homes fell 538,000, a figure that is a little lower than the very large levels of the last six months.


    Does this mean that the housing recession has bottomed out? The answer is no for two reasons. First, the new home sales figures are not rosy once one understands why such sales went up. Second, all of the other housing indicators of the week (existing home sales and inventories, Toll Brothers’ plunge of earnings and revenues, FHFB data on falling Q1 home prices, the S&P/Case-Shiller Index showing falling home prices in Q1) suggest continued and persistent weakness of the housing market and a deepening recession in this sector.


    Let us start with the first point. An increase of 16% in new home sales looks huge until you notice the following points: new home sales are still 29% down from their July 2005 peak; the inventory figures for new homes exclude cancellations. We know that cancellations are massive, in the 20 to 30% range based on data provided by the two largest home builders in the US (DR Horton and Toll Brothers). Therefore, the actual stock of unsold new homes is much larger, at least 20% higher than the reported figures.


    More importantly, new home sales surged in April but the median price of a home fell – in one month – by 11% to $229k. Now think about Economics 101: higher equilibrium sales and lower equilibrium prices. How can you get that? The answer is simple: the increase in sales cannot be driven by an exogenous increase in the demand for homes as such increase would have led to higher sales and higher prices. The only way you get higher sales and lower prices is if the home supply function – at any price level – has increased so that in equilibrium the excess of unsold homes leads to more demand at a lower price. I.e. the April data are consistent with only with the view that home builders – desperate with a massive and record stock of unsold new homes – decided to start slashing prices to reduce this overhang.


    Is that good news? No for two reasons: first, the excess supply of new homes is still so large that only much lower home prices will dent this overhang; second, lower home prices means lower home equity and lower home wealth for homeowners.


    Let us consider next the other recent news on the housing sector that all suggest a continued and deepening recession in housing…


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  • Wolf in the FT today on the Roubini recent paper on Asian financial issues and the instability of BW2

    Martin Wolf – in his FT column today – discusses my latest paper on Asia financial issues and the instability of the Bretton Woods 2 (BW2) regime of effective currency pegs to the US dollar that is followed China, most of East Asia and many other emerging market economies. The paper is  titled “Asia is Learning the Wrong Lessons from Its 1997-98 Financial Crisis: […]

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  • Business Week on “The Poverty Business”

    This past week Business Week’s excellent cover story was on the “Poverty Business”, i.e. as the magazine put it in the sub-title of the cover story: “Inside U.S. companies’ audacious drive to extract more profits from the nation’s working poor.” As the magazine pointed in a most excellent and detailed reporting, this poverty business does […]

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  • Is Latin America Less Vulnerable to Capital Market Crises because of Its Current Account Surplus?

    Guillermo Calvo and Ernesto Talvi have written a most interesting piece on the new RGE Latin America Economonitor blog. They argue that the fact that the Latam region has overall moved from current account deficits to surpluses since the crises of the last decade does not mean that the risk of an external capital market […]

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  • After Wolfensohn and Wolfowitz I propose Wolf…as in Martin Wolf

    Now that Wolfie is gone – good riddance – the hunt for the next World Bank president has started in earnest. The names of a number of possible candidates for the job have been circulating in the press:  Tony Blair, Arminio Fraga, Ashraf Ghani, Robert Zoellick, Kemal Dervis, Stan Fischer, Paul Volcker, Bob Kimmitt, Peter […]

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  • Housing Recession Deepens and Subprime Credit Crunch Spills Over to Other Mortgages

    Today’s figures on housing starts and building permits show that the housing recession is worsening. First of all the reported 2.5% increase in housing starts in April is a total optical illusion: the reported 1.528 million of housing starts was a 2.5% increase relative to a March figure that was revised significantly downward from 1.518 to 1.491. If you compare housing starts with the initial estimate of starts for March, the increase is only 0.65%. I.e. only if you blissfully ignore that March was much worse ex-post than its first estimate you can argue that you had an increase in April relative to an even more depressed March.

    More importantly, and ominously, building permits plunged another whopping 8.9%, down to 1.429 million, their lowest level in 10 years. Building permits are a leading indicator of housing starts as you need to get a building permit to start a housing project. The usual lag between permits and starts is one or two months. So, since current starts are about 7% above current building permits one can comfortably expect that housing starts will fall again in May and the months ahead.

    Other data from the housing market are no better; they all point to a worsening housing recession. Moreover, there is strong evidence that the massive credit crunch in the subprime mortgage market is now spilling over to other near prime and prime mortgages and also more broadly to some non-housing components of consumer credit. Let me elaborate:

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  • Brazil’s FX intervention, currency and interest rate policy dilemmas

    Italo Lombardi, from IdeaGlobal, has written a very interesting piece for the new RGE Latin American Economonitor Blog on Brazil’s exchange rate intervention policies. The issue is as follows. A country faced with large and possibly excessive capital inflows – like  Brazil today – faces difficult policy dilemmas:   it can let its currency float and […]

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  • US Q1 growth likely to be revised to 0.7%: we are already in a “growth recession” range. And Q2 started even worse than Q1.

    Based on a variety of data that have come out after the first estimate of Q1 US growth at 1.3% it is now likely that US growth in Q1 was actually below 1% (probably close to 0.7%); we are thus already into a “growth recession” territory. As discussed extensively in this blog a US hard landing can take two forms: a “growth recession” i.e. a period of time when growth is well below potential and in the 0% to 1% range; or an outright recession, i.e. two consecutive quarters of zero growth. 

    If Q1 growth turns out to be below 1% (as now likely) we would already be in growth recession range in Q1. The revisions of Q1 GDP growth that will push the revised estimate of Q1 growth rate below 1% are: 

    – Lower change in inventories than initially estimated reducing Q1 growth

    – Better construction spending than initially estimated increasing Q1 growth

    – Much worse trade balance in March than initially estimated reducing Q1 growth

    The net effect of these three factors is an estimated 0.7% growth for Q1 (JP Morgan today revised its Q1 estimate downward to 0.8%). 

    Much more seriously, Q2 started on a very weak note for private consumption based on initial estimates of retail sales. I now expect Q2 growth to be closer to 0% or even negative (i.e an outright recession).

    Let me explain why…

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  • My new paper: Asia is learning the wrong lessons from its 1997-98 crisis and is now following policies that may lead to a new and different type of financial crisis

    I have been in Asia for the last week, first at a conference in Korea on the post-mortem of the 1997-98 Asian crisis and the challenges faced by Asia in the future, now in Kyoto Japan where the 40th Annual Meetings of the Asian Development Bank are taking place. 2007 is also the 10th anniversary […]

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