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Roubini Predicts 2007 Recession
Nouriel Roubini, an economist at New York University and a former U.S. Treasury official, predicts a recession in Q1 2007.

Housing is falling at an annual rate of 6% (10% next quarter), and consumption is falling. Goods inventories are rising, because companies are producing more and demand is reduced. Corporate profits are returned to shareholders, because companies cannot find good investment opportunities for their cash.

Ben cannot come to the rescue, since all measures of inflation are going up. Even if the Fed stops in August or even eases next month - you still have the tightening of the last few months in the pipeline. The fall in housing will kill the economy. We are the point of no return. (In 2000 the Fed paused in June, and we had a recession by year-end.)

Recessions come on rapidly. Before the 2000-01 recession, we grew 5% in Q2 2000, by year-end we were at 0%, and by Q1 2001 we were in a recession. This time it will be the same: Q1 5.6%, Q2 2.5%, Q4 0%, and a recession by the first quarter of next year. "It is very rapid".

The last recession was shallow. It was a tech recession, but wages were rising and we didn't have a housing bubble, so consumption remained resilient.

This will be a true consumer recession. With high debt, no savings, higher interest rates, and high oil, there's no way the consumer can be resilient.

Some say there is enough momentum of growth in Asia and Europe to decouple from the U.S. That is wishful thinking. There was no decoupling in any previous U.S. recession, and Roubini wrote a paper explaining 12 reasons the entire world economy will be affected.

We can't lower rates to 1% again to save the economy. Last time it could be done because we were in a period of falling inflation. Now we have inflationary pressures in the economy, so we could reduce a little bit, but not much.

The US recession will have a signifcant effect on China. Further problems for China are their fixed exchange rate, because it prevents an independent monetary policy. China is overheating, so they need to tighten monetary policy. But with a fixed exchange rate they cannot control their monetary policy.
They need to let their currency appreciate and raise interest to cool their economy. They can't just use administrative control - it has not worked, and it will not work.

END of Roubini audio.

I think it will be just as interesting to see what happens to our trading partners, esp. China. Will they finally let the renminbi appreciate, to regain monetary control?

http://piggington.com/roubini_predicts_2007_recession