United States is headed for a recession that will be "much
nastier, deeper and more protracted" than the 2001 recession,
says Nouriel Roubini, president of Roubini Global Economics.
Writing on his blog Wednesday, Roubini repeated his call that the U.S. would
be in recession in 2007, arguing that the collapse of housing would
bring down the rest of the economy.
Roubini wrote after the National Association of Realtors reported Wednesday
that sales of existing homes fell 4.1% in July, while inventories soared to
a 13-year high and prices flattened out on a year-over-year basis.
"This is the biggest housing slump in the last four or five decades:
every housing indicator is in free fall, including now housing prices,"
The decline in investment in the housing sector will exceed the drop in investment
when the Nasdaq collapsed in 2000 and 2001, he said.
And the impact of the bursting of the bubble will affect every household
in America, not just the few people who owned significant shares in technology
companies during the dot-com boom, he said. Prices are falling even in the
Midwest, which never experienced a bubble, "a scary signal" of how
much pain the drop in household wealth could cause.
Roubini is a professor of economics at New York University and was a senior
economist in the White House and the Treasury Department in the late 1990s.
His firm focuses largely on global macroeconomics.
While many economists share Roubini's concerns about imbalances in the global
economy and in the U.S. housing sector, he stands nearly alone in predicting
a recession next year.
Fed watcher Tim Duy called Roubini the "the current archetypical Eeyore,"
responding to a comment Dallas Fed President Richard Fisher made last week
in referring to economic pessimists as "Eeyores," after Winnie the
Pooh's grumpy friend.
"By itself this slump is enough to trigger a U.S. recession: its effects
on real residential investment, wealth and consumption, and employment will
be more severe than the tech bust that triggered the 2001 recession,"
Housing has accounted, directly and indirectly, for about 30% of employment
growth during this expansion, including employment in retail and in manufacturing
producing consumer goods, he said.
In the past year, consumers spent about $200 billion of the money they pulled
out of their home equity, he estimated. Already, sales of consumer durables
such as cars and furniture have weakened.
"As the housing sector slumps, the job and income and wage losses in
housing will percolate throughout the economy," Roubini said.
Consumers also face high energy prices, higher interest rates, stagnant wages,
negative savings and high debt levels, he noted.
"This is the tipping point for the U.S. consumer and the effects
will be ugly," he said.