Analysts refuse to accept what’s right in front of them. That’s the latest economic take from the famed economist Nouriel Roubini. While “the risk of a disorderly crisis in the eurozone is well recognized,” he wrote, that’s not so in the United States.
“For the last three years, the consensus has been that the U.S. economy was on the verge of a robust and self-sustaining recovery that would restore above-potential growth,” Roubini wrote on Friday for the Project Syndicate website in a piece called “American Pie in the Sky.” “That turned out to be wrong, as a painful process of balance-sheet deleveraging—reflecting excessive private-sector debt, and then its carryover to the public sector—implies that the recovery will remain, at best, below-trend for many years to come.”
Even this year, he continued, the consensus got it wrong, expecting a recovery to above-trend annual GDP growth—faster than 3%. But the first-half growth rate looks set to come in closer to 1.5% at best, even below 2011’s dismal 1.7%. He called the notion that falling oil prices, rising home prices and stronger auto sales and manufacturing would fuel above-trend 2013 growth a “fairy tale.”
He then launched into five reasons he believes growth will further slow in the second half of 2012 and be even lower in 2013—what he calls “close to stall speed.” 1) “Growth in the second quarter has decelerated from a mediocre 1.8% in January-March, as job creation—averaging 70,000 a month—fell sharply.”
2) Expectations of the “fiscal cliff”—automatic tax increases and spending cuts set for the end of this year—will keep spending and growth lower through the second half of 2012, he writes.
“So will uncertainty about who will be president in 2013; about tax rates and spending levels; about the threat of another government shutdown over the debt ceiling; and about the risk of another sovereign rating downgrade should political gridlock continue to block a plan for medium-term fiscal consolidation.”
3) The fiscal cliff would amount to a 4.5%-of-GDP drag on growth in 2013 if all tax cuts and transfer payments were allowed to expire and draconian spending cuts were triggered. 4) “Private consumption growth in the last few quarters does not reflect growth in real wages (which are actually falling),” he wrote. “Rather, growth in disposable income (and thus in consumption) has been sustained since last year by another $1.4 trillion in tax cuts and extended transfer payments, implying another $1.4 trillion of public debt.”
In other words, “The U.S. has prevented some household deleveraging through even more public-sector re-leveraging—that is, by stealing some growth from the future.”
5) Four external forces will further impede U.S. growth: “a worsening eurozone crisis; an increasingly hard landing for China; a generalized slowdown of emerging-market economies, owing to cyclical factors (weak advanced-country growth) and structural causes (a state-capitalist model that reduces potential growth); and the risk of higher oil prices in 2013 as negotiations and sanctions fail to convince Iran to abandon its nuclear program.”
He concluded that a significant equity-price correction “could, in fact, be the force that in 2013 tips the U.S. economy into outright contraction. And if the U.S. (still the world’s largest economy) starts to sneeze again, the rest of the world—its immunity already weakened by Europe’s malaise and emerging countries’ slowdown—will catch pneumonia.”