Some news from the Reapers hero...Roubini is an optimist..
The U.S. Growth Weakness Will Persist in the Second Half of 2007...And Financial Markets Are Signaling a Credit Crunch Ahead
Nouriel Roubini | Jul 26, 2007 The first estimate of US Q2 GDP growth will be out tomorrow Friday. After a dismal "growth recession" in Q1 (0.7%) Q2 growth is expected by the consensus to recover towards 3% (plus or minus a 0.3%) as net exports, inventories and capex spending may have partially recovered in Q2 in spite of a sharp slowdown of private consumption and a continued severe housing recession. Even if Q2 growth were to turn out to be around 3% the average for Q1 and Q2 would be a mediocre and weak 1.8%, well below potential growth.
But since we are already in Q3 the main issue is now what will growth be in the second half of 2007. I see many elements of economic weakness ahead.
First, the housing recession is getting worse, rather than better. Thus, housing will continue to be a significantly negative contributor to growth. I predicted a year ago this will be the worst US housing recession in the last five decades and that real home prices will sharply fall for three years: all indicators on housing - including the latest new and exisiting home sales - suggest that the housing recession is extremely severe as sharply worsening. Also, home prices are falling and expected to fall throughout 2008. For the first time since the Great Depression of the 1930s home prices will fall this year at the national level on a year over year basis. And the glut of unsold new and existing homes will worsen well into 2008 as: demand from potential subprime borrowers sharply falls given the credit crunch in mortgages; rising foreclosures will increase the excess supply of homes in the market; $1.5 trillion of resetting ARMs will lead many homeowners under stress to sell their homes; condo-flippers and others who bought homes for speculative reasons will dump them in a falling market to minimize their capital losses.
Second, as discussed in much more detail in a previous blog of mine, private consumption (representing 70% of GDP) is likely to grow very slowly in H2 continuing its Q2 slowdown. Weakness in private consumption will be driven by a consumer that is saving-less and debt burdened and who is experiencing rising oil and gasoline prices, falling home values (as home prices are falling), falling home equity withdrawal, a credit crunch in the mortgage market, rising consumer interest rates, falling consumer confidence and a weaker labor market than what the official numbers suggest. Indeed, recent data on weekly chain store retail sales in July suggest that the softness of retail sales in June is persisting in July with sales falling in the latest reporting week. Thus, I expect that real private consumption will grow less than 2% in H2.
Third, real investment (in software and equipment) by the private sector will remain weak. The alleged recovery of capex spending in Q2 - after a dismal Q4 2006 and Q1 2007 - is fizzling out: today's figure on capital goods order - falling in June for a second month in a row - suggest that even in Q2 the alleged recovery in corporate capital investment was more modest than the consensus expected. And with housing, the auto sector and several other housing-related sectors already in a recession, it is highly unlikely that capex spending will be strong in H2. Why should firm invest a lot if final consumption demand is slowing down?
Fourth, accumulation of inventories will provide a boost to growth in Q2 but they are likely to be a drag on growth in H2. Inventories can go up for two reasons, one positive and one negative. On the positive side, if firms are optimistic about future sales/demand they may accelerate output/production above demand to build inventories for future sales. But if demand is unexpectedly slowing below production, the built up of unsold inventories is bad news as it signals lower demand ahead and the need to cut production ahead. Thus, if I am correct that private consumption, housing and capex spending will be weak in H2, the current accumulation of inventories signals a build up of unsold goods that will trigger output adjustment and a reduction of inventories in H2.
Fifth, net exports are not likely to be - unlike Q2 - a positive contributor to growth in H2. With oil prices rising and expected to remain high for the rest of 2007, the improvement in the real trabe balance due to a weaker dollar may be swamped by high oil and other commodity prices increasing the import bill.
