U.S. Recession Fear Grows

U.S. Recession fear grows
Housing data have analysts fretting

http://www.canada.com/nationalpost/n...d7690b&k=84992

Jacqueline Thorpe, National Post
Published: Wednesday, August 30, 2006

The "R" word is starting to seep into Wall Street lexicon and expectations of a pause on U.S. interest rate hikes are being replaced by forecasts for cuts.

After watching the parade of dismal U.S. housing data in recent weeks, it was only a matter of time before economists began to wind up their recession risk-o-meters.

According to the minutes from the last U.S. Federal Reserve meeting, released yesterday, even the Fed is starting to get a little anxious about housing.

Nouriel Roubini, an economics professor at New York University and flavour-of-the-month on business TV, says the effects of the ongoing housing bust on real residential investment, wealth and consumption, and employment will be more severe than the tech bust that triggered the 2001 recession.

"And on top of the housing bust, U.S. consumers are facing oil above US$70, the delayed effects of rising fed-fund and long-term rates, falling wages, negative savings, high debt ratios and higher and higher debt-servicing ratios," Mr. Roubini wrote on his blog at www.rgemonitor.com.

"The tipping point for the U.S. consumer, and the effects will be ugly. Expect the great recession of 2007 to be much nastier, deeper and more protracted than the 2001 recession."

Other analysts have been slightly less alarmist, but the unease over a possible American slowdown is starting to swell.

National Bank in Montreal has raised the risk of a U.S. recession to 40% from 25%.

David Rosenberg, a long-time housing bear at Merrill Lynch, sees growth of 1.8% for the United States next year.

If not a recession, that's an awfully hard landing for an economy with a potential growth rate around 3%.

According to yesterday's minutes, the U.S. Federal Reserve seems uncertain which way the economy will head, saying additional rate hikes may "well be needed."

But it is clear the Fed is also watching housing like a hawk.

"The slower pace of increase in housing wealth would restrain consumption growth, though by how much is uncertain," the minutes said.

There are still plenty of analysts who maintain the U.S. economy can slowly and softly drift to a slower rate of growth.

Dominic Konstam, head of the interest rate group at Credit Suisse in New York, figures U.S. corporations, in their best financial health in half a century, will be a major offset to the housing slump as they won't have to drastically slash jobs to save themselves.

"[Companies] are going to loosen the labour market a little bit but nothing like they did in 2001," Mr. Konstam said. Employment, more than housing wealth, drives consumption and the economy.

The Fed, meanwhile, will step in with rate cuts before things get too ugly, he adds. While markets are pricing in cuts toward the end of 2007, the Fed could move more quickly.

The Fed does tend to change tracks fast, according to a handy "Anatomy of Federal Reserve rate cuts" put out by National Bank.

"History tells us that with the exception of the 1997-98 episode, pauses in interest rates do not last long when they are preceded by monetary tightening," Yanick Desnoyers, senior economist at National, said in his report. "The norm is about six months."

Several developments have to take place, Mr. Desnoyers notes.

GDP has to slow below the real 3% level, as happened in 1989, 1995 and 2000. Growth this time around has already faded to an annual rate of 2.5% in the second quarter from 5.6% in the first. Only time will tell if the slowdown will be sustained.

Job creation has to slow, often to around 100,000 a month. One reason corporate profits are in fact so fat is that companies have been stingy with their hiring. Job creation has not been above 125,000 in the last four months Mr. Desnoyers said.

The third development tends to be a slowdown in manufacturing. This time manufacturing is holding up fairly well however.

This cycle, as many have noted, has not been about manufacturing but housing.

Mr. Desnoyers says these developments have to be especially pronounced this time around because inflationary pressures have been a little higher than normal.

As per its anatomy, National Bank sees rate cuts in the first half of 2007.

jthorpe@nationalpost.com