Nouriel Roubini's Global EconoMonitor

The Straits of America

From Project Syndicate:

Macroeconomic indicators for the United States have been better than expected for the last few months. Job creation has picked up. Indicators for manufacturing and services have improved moderately. Even the housing industry has shown some signs of life. And consumption growth has been relatively resilient.

But, despite the favorable data, US economic growth will remain weak and below trend throughout 2012. Why is all the recent economic good news not to be believed?

First, US consumers remain income-challenged, wealth-challenged, and debt-constrained. Disposable income has been growing modestly – despite real-wage stagnation – mostly as a result of tax cuts and transfer payments. This is not sustainable: eventually, transfer payments will have to be reduced and taxes raised to reduce the fiscal deficit. Recent consumption data are already weakening relative to a couple of months ago, marked by holiday retail sales that were merely passable.

At the same time, US job growth is still too mediocre to make a dent in the overall unemployment rate and on labor income. The US needs to create at least 150,000 jobs per month on a consistent basis just to stabilize the unemployment rate. More than 40% of the unemployed are now long-term unemployed, which reduces their chances of ever regaining a decent job. Indeed, firms are still trying to find ways to slash labor costs.

Rising income inequality will also constrain consumption growth, as income shares shift from those with a higher marginal propensity to spend (workers and the less wealthy) to those with a higher marginal propensity to save (corporate firms and wealthy households).

Moreover, the recent bounce in investment spending (and housing) will end, with bleak prospects for 2012, as tax benefits expire, firms wait out so-called “tail risks” (low-probability, high-impact events), and insufficient final demand holds down capacity-utilization rates. And most capital spending will continue to be devoted to labor-saving technologies, again implying limited job creation.

At the same time, even after six years of a housing recession, the sector is comatose. With demand for new homes having fallen by 80% relative to the peak, the downward price adjustment is likely to continue in 2012 as the supply of new and existing homes continues to exceed demand. Up to 40% of households with a mortgage – 20 million – could end up with negative equity in their homes. Thus, the vicious cycle of foreclosures and lower prices is likely to continue – and, with so many households severely credit-constrained, consumer confidence, while improving, will remain weak.

Given anemic growth in domestic demand, America’s only chance to move closer to its potential growth rate would be to reduce its large trade deficit. But net exports will be a drag on growth in 2012, for several reasons:

  • The dollar would have to weaken further, which is unlikely, because many other central banks have followed the Federal Reserve in additional “quantitative easing,” with the euro likely to remain under downward pressure and China and other emerging-market countries still aggressively intervening to prevent their currencies from rising too fast.
  • Slower growth in many advanced economies, China, and other emerging markets will mean lower demand for US exports.
  • Oil prices are likely to remain elevated, given geopolitical risks in the Middle East, keeping the US energy-import bill high.

It is unlikely that US policy will come to the rescue. On the contrary, there will be a significant fiscal drag in 2012, and political gridlock in the run-up to the presidential election in November will prevent the authorities from addressing long-term fiscal issues.

Given the bearish outlook for US economic growth, the Fed can be expected to engage in another round of quantitative easing. But the Fed also faces political constraints, and will do too little, and move too late, to help the economy significantly. Moreover, a vocal minority on the Fed’s rate-setting Federal Open Market Committee is against further easing. In any case, monetary policy cannot address only liquidity problems – and banks are flush with excess reserves.

Most importantly, the US – and many other advanced economies – remains in the early stages of a deleveraging cycle. A recession caused by too much debt and leverage (first in the private sector, and then on public balance sheets) will require a long period of spending less and saving more. This year will be no different, as public-sector deleveraging has barely started.

Finally, there are those tail risks that make investors, corporations, and consumers hyper-cautious: the eurozone, where debt restructurings – or worse, breakup – are risks of systemic consequence; the outcome of the US presidential election; geo-political risks such as the Arab Spring, military confrontation with Iran, instability in Afghanistan and Pakistan, North Korea’s succession, and the leadership transition in China; and the consequences of a global economic slowdown.

Given all of these large and small risks, businesses, consumers, and investors have a strong incentive to wait and do little. The problem, of course, is that when enough people wait and don’t act, they heighten the very risks that they are trying to avoid.

Nouriel Roubini is chairman of Roubini Global Economics ( and Professor at the Stern School of Business, NYU.

21 Responses to “The Straits of America”

Aegean1972January 13th, 2012 at 3:30 pm

I think the US unemployment and the housing crisis will take a few more years until theres some light at the end of the tunnel.

The (long avoided) era of deleveraging has started and that can only mean one thing. Minimal spending (public or private) and more austerity measures. We have criticised merkel alot for "kickin the can down the road" in europe, but i think the US is into deeper trouble in the years to come. At least merkel is doing something to get things in order.

Someone in the US (meaning politicians) has to make a start to sort out this enormous mess. Until then…we might have a coupla years or even a decade of minimal growth.

Things might get worse before they get any better. the longer politicians postpone a solution, the worse the problem gets.

Jim MaronJanuary 13th, 2012 at 8:56 pm

"But, despite the favorable data, US economic growth will remain weak and below trend throughout 2012."

Your thesis gives you all the flexibility in the world to claim you were correct as long as growth doesn't exceed the average.

It's like flipping a coin – and betting it comes up heads…then listing 50 reasons why it landed that way.

Rassegna web: l’imperialismo del dollaro e le “primavere arabe” « Trading WarriorsJanuary 14th, 2012 at 7:44 am

[…] Il terzo intervento reca la firma di Doctor Doom: gli indicatori macroeconomici USA si sono rivelati migliori del previsto, sia per quanto riguarda i livelli occupazionali sia per quanto riguarda il mercato immobiliare sia per l’andamento del settore manifatturiero. Le ombre tuttavia non mancano, afferma Nouriel Roubini, e sarebbe sbagliato escludere a priori la possibilità di un nuovo scivolone recessivo. (leggi l’intervento su […]

MarcusSedlmayrJanuary 14th, 2012 at 8:51 am

What persistently confused me in the Anglo-Saxon world is its focus on numbers and accounts and the lack to come up with a real solution how this expected vicious cycle is to be stopped. Yes, we know that there is too much debt and that the U.S. has to pay a high price for oil and that we face massive deleveraging. But just waiting and drinking tea should be the solution?

The challenge is how to give the world its optimism back again. This is a sociological and a psychological problem. We all seem to be in a collective state of mental depression. Why don’t we all commit suicide? Certainly that will solve many problems.

I am disappointed that all the smart guys from economics do not come up with an inventive solution which gives us back the optimism which we all need. Historically, country leaders created optimism by providing the prospect of war and adventure. From a fundamental point of view there is nothing such as debt or credit. There is only the willingness or the absence of willingness of people to work and to work harder to create products and services.

The financial industry can help here by converting personal debt to equity. Why should only organizations be able to issue equity? When I believe for example that Prof. Roubini is a sound investment because he keeps his personal finances in good order and because his children get a good education why shouldn’t I be able to buy a stake in him?

Gust AvrakotosJanuary 14th, 2012 at 3:08 pm

Marcus, see: King Canute. Things like optimism don't appear on command. Some things, like deleveraging, require time, and cause pain. Magic wands went out with the Brothers Grimm.

Russ AbbottJanuary 18th, 2012 at 2:57 am

Here's an alternative for the Fed. Give it the authority to impose a rebate/surcharge on commercial transactions. This would be like a sales tax (sales rebate) except that the money would go to and come from the Fed. That is, it would be a monetary rather than a fiscal action. This avoids the problem of the zero lower bound and gives the Fed a direct means for influencing aggregate demand. The idea is explained in 1000 more words here:

melvin shapiroJanuary 18th, 2012 at 6:51 pm

The key to American success today is a competitive edge. Prior to WW2 America was thriving as the engine of the Industrial Revolution for a couple of reasons: widespread opportunity and access to cheap energy and cheap labor. Today: opportunity has been strangled with a maze of government red tape; highly regulated labor; very costly energy. An American success plan should start with reduction of regulations, especially in the development of energy. Energy development in North Dakota has created a '49ers Gold Rush environment for job seekers in the Bakken area oil fields. More high paying jobs than job seekers!

A Federal Government program subsidizing America's rolling stock to CNG would drastically reduce the demand for imported oil, driving down the cost of that resource which is used in virtually everything Americans consume. Imported oil is in effect a tax upon all Americans that goes off-shore, into the pockets of those opposed to our style of government and freedom, and unlike a legitimate tax is never returned as a government service! Development of CNG, clean coal, our own oil, and new nuclear energy would further drive down the cost of energy. Top-off this plan with the elimination of all taxes on all energy and suddenly you'd have very cheap energy costs, attracting manufacturers from around the world. Jobs: building and re-fitting CNG facilities across the country; building new nuke and clean coal plants, jobs developing our own oil resources – not allowed to be exported! Opportunities for the development of ancillary businesses surrounding these industries wouls spring-up across the country.

That's an American Recovery plan. Not wasted money kicking the can down the road. Not an ideology with a hidden agenda to "fundamentally change" what was and still has the capacity to be the greatest system ever created. We've already spent so much of our ability to repay that which we've already borrowed and now that scheme is busted. Proven, BUSTED! Time to go to work. Real work that makes stuff the world needs.

Let's begin with energy! That's an edge the rest of the wold cannot beat. That's the edge we've still got. We've got the talent, we've got the resources, we've got the people. Let's unleash them – – let's compete!

Erico WulfJanuary 18th, 2012 at 7:14 pm

It is also feasible that the financial link (USA-Europe) works in the opposite direction to what it is needed, as long as there is complementary between both. Thus, a weak financial system in Europe ,might l also affect further the pace of USA recovery as long as there is lack of liquidity to support the cash flow requirement. Therefore 2012 , seems to be the year of the Federal Reserve again.-

Deva SagayamFebruary 7th, 2012 at 2:30 pm

Learn from China. Subsidise all new basic industry from steel to electronics.
So far Wall street has been subsidised to an extent of 29 trillion dollars.
The money needed to kick start manufacturing industries in US can be half that amount.
This will have a multiplier effect unlike the handout to wall street.
Employment, incomes will certainly look up.

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