tinyurl.com/o8nx7q -> www.forbes.com/2009/05/20/depression-recession-green-shoots-housing-jobs-opinions-columnists-nouriel-roubini.html
Recent data suggest that the rate of economic contraction in the global economy is slowing down, and that we are closer than we were six months ago to the trough of the recent severe global recession. But while the rate of economic contraction is now lower than the free-fall and near-depression experienced by many economies in the fourth quarter of 2008 and the first of 2009, the recent optimism that "green shoots" of recovery will lead to the recession to bottom out by the middle of this year--and that recovery to potential growth will rapidly occur in 2010--appears grossly misplaced, for three noteworthy reasons.
image rss First, the current deep and protracted U-shaped recession in the US and other advanced economies will continue through all of 2009, rather than reach a trough in the middle of this year as expected by the optimists. Second, rather than a rapid V-shaped recovery, growth will remain sluggish and sub-par for at least two years into all of 2010 and 2011. A couple of quarters of more rapid growth cannot be ruled out as we get out of this recession toward the end of the year or early next year as firms rebuild inventories and the effects of the monetary and fiscal stimulus reach a delayed peak. But structural weaknesses of the US and the global economy will cause both a below-trend growth and even the risk of a reduction of potential growth itself. Third, we cannot rule out a double-dip W-shaped recession, with the wings of a tentative recovery of growth in 2010 at risk of being clipped toward the end of that year or in 2011. This will result from a perfect storm of rising oil prices, rising taxes and rising nominal and real interest rates on the public debt of many advanced economies, as concerns rise about medium-term fiscal sustainability and the risk that monetization of fiscal deficits will lead to inflationary pressures after two years of deflationary pressures. Let me explain in detail these three serious risks to the US and global economic outlook.
people ) in the fall of 2008, the global financial system went into cardiac arrest. The rate of economic contraction in Q4 of 2008 and Q1 of 2009 was at near-depression rates in most advanced economies, and even in many vulnerable emerging-market economies. Peering into the abyss of a near-depression, global policymakers--who had been behind the curve for most of 2007-2008, having misunderstood the severity of this financial crisis and its real effects--got religion. They started to use almost all of the weapons in their policy arsenal to prevent a severe stag-deflation (which I define as a combination of a severe stagnation/recession and deflation). These weapons included significant fiscal policy easing; backstopping the financial system to the tune of trillions of dollars to reduce the liquidity and credit crunch; a provision of massive support to emerging-market economies via new swap facilities and a tripling of IMF resources; and policies of forbearance toward the banking system to restore credit growth. In the last two months alone, one can count over 150 different policy-easing actions/programs around the world. This policy equivalent of a "Powell doctrine" of overwhelming force led to a slowdown in the rate of economic contraction that sets the stage for a bottoming out of most economies toward the end of 2009, or early in 2010. Even so, the optimists who in 2009 spoke of a soft landing for the US economy or a mild V-shaped eight-month recession (like the US ones in 1990-91 and 2001) were proved utterly wrong, while those who argued that this would be a longer and more severe U-shaped, 24-month recession were correct. In the US, we are already in the 18th month of a U-shaped recession; If the recession were over by Q4 of 2009, it will be--at 24 months--three times as long and at least six times as deep as the previous two. Even if it were over by Q3 of this year, it would still be--at 21 months--the most severe US recession in the last 60 years. Since the consensus was wrong last year about a short and shallow V-shaped recession, the new variant of the optimistic view is but another variant of the V-shaped recession: According to the consensus, the recession will be over by the middle of 2009 (ie, in a month or so); positive growth will return by Q3 and be as high as 2% by Q4; and the recovery of growth in 2010 and beyond will be rapid, sustained and close to potential growth, with no risk of another economic downturn. All three elements of the new optimistic consensus are flawed. Let us start with the talk about "green shoots" of recovery and the argument that the recession will be over by mid-year, with a return to positive growth by Q3. In addition to the talk about green shoots, you hear similar bullish variants under terms such as "glimmers of hope," "positive second derivatives" and "signs of bottoming out, stabilization and recovery." What is the basis for the argument that the US and global recession will be over soon?
people )--a firm that was more bearish than the consensus in 2008--is the most sophisticated exponent of the "green shoots" hypothesis. In a paper written in mid-March, the research group Goldman pointed out four economic variables/factors/green shoots that were signaling a bottoming out of the recession: initial claims for unemployment benefits; Out of the four, they recognized that initial claims were still high and ugly, but hoped that they would stabilize and contract soon, while they argued that the other three were already signaling green light. Unfortunately, the US data from the last month have dashed the hope of green shoots and shown them to be yellow weeds. First, initial unemployment claims were around 650,000 and fell toward 610,000. Goldman and Robert Gordon (a member of the NBER Business Cycle Dating Committee) even argued that, historically, the peak of the initial claims is always associated with the end of a recession, hinting that the recession was over by May or would be, at the latest, by June.
people ) over the summer are now likely to lead initial claims to another peak of 700,000 some time this summer, on top of adding another 300,000 job losses to the already mounting ones. Even the bullishness that job losses will rapidly shrink is altogether misplaced: Yes, in April "only" 540,000 jobs were lost, as opposed to the 650,000 of March; but if you exclude the 70,000 temporary government worked hired by the Census, private sector job losses were still a whopping 611,000 in April, a figure as ugly as ever. Also, note that in the 2001 recession, job losses averaged 150,000 per month (not 650,000 as in recent months), and that while that recession was technically over in November 2001, job losses--being, like the unemployment rate, a lagging indicator--continued all the way through August 2003. So while one could expect that job losses in the private sector may soon fall from the near-depression levels of 600,000 to 700,000 per month, even a fall of such job losses to a rate of 300,000 to 400,000 per month some time later in the second half of this year would still be massive--and much larger than in the 2001 recession. So on the unemployment front, there are no green shoots either in the present or in the likely near future: You can see only yellow or brown weeds. Second, the optimistic view on retail sales and consumption was based on better-than-expected January and February retail sales. But after the free fall in the holiday season, and given heavy discounts, a temporary rebound was not unlikely. Again, too bad that all the talk about green shoots in consumption and retail sales was soon smashed by an ugly March retail sales report, which showed a sharp contraction, and a similarly ugly April report that showed falling sales and consumption. The green-shooters forgot about the fundamental forces dragging down the US consumer, who is shopped-out, without savings, debt-burdened and with rising debt-servicing ratios; who has lost 25% of the value of his or her home (and remember, home prices are still free-falling); who cannot use his or her home as an ATM since home equity withdrawal has fallen from $700 billion in...
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