Tags: Roubini | US | Stocks | fed

Roubini: US Rebound a 'Fairy Tale,' Stocks to Fall

Friday, 20 Jul 2012 12:56 PM

U.S. stocks have risen in recent years but mainly due to the Federal Reserve's moves to stimulate the economy.

The Fed may move again to prop up the country and stave off recession, but results will be weak and stock prices will plummet when the monetary sugar rush ends, said New York University economist Nouriel Roubini.

Previous calls for U.S. gross domestic product growth of around 3 percent this year have been off, with forecasts being slashed.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

"The first-half growth rate looks set to come in closer to 1.5 percent at best, even below 2011’s dismal 1.7 percent," Roubini wrote in a Project Syndicate column.

"And now, after getting the first half of 2012 wrong, many are repeating the fairy tale that a combination of lower oil prices, rising auto sales, recovering house prices, and a resurgence of U.S. manufacturing will boost growth in the second half of the year and fuel above-potential growth by 2013." Roubini wrote.

Despite improving manufacturing industries and a housing sector that appears to be bottoming out, a sharp fiscal retrenchment will strike the country at the end of this year.

At the close of 2012, tax breaks, including the Bush-era tax cuts, will expire, while automatics cuts to government spending will kick in, a combination dubbed as a "fiscal cliff" that will siphon $500 billion out of the economy next year alone and possibly spark a recession if Congress doesn't act.

Further, Federal Reserve stimulus measures such as buying bonds from banks to prop up the economy and stock prices — known as quantitative easing — are temporary measures that carry diminishing returns, meaning further action won't help much.

Add to that uncertainty, headwinds from the European debt crisis, a cooling Chinese uncertainty and weak wages will ring in a fresh downturn, wrote Roubini, who accurately called the housing bust and subsequent recession long before it happened.

"The gravity of weaker growth will most likely overcome the levitational effect on equity prices from more quantitative easing, particularly given that equity valuations today are not as depressed as they were in 2009 or 2010," he wrote. "Indeed, growth in earnings and profits is now running out of steam, as the effect of weak demand on top-line revenues takes a toll on bottom-line margins and profitability," he wrote.

"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."

Even if lawmakers work to steer the country away from the fiscal cliff, not an easy task in an election year, uncertainty over the event can crimp consumer spending, the motor of the U.S. economy.

Federal Reserve Chairman Ben Bernanke has said Congress must find a way to steer the country away from the cliff or the economy will suffer, adding monetary policy tools won't work.

“U.S. fiscal policies are on an unsustainable path, and the development of a credible medium-term plan for controlling deficits should be a high priority,” Bernanke told the Senate Banking Committee recently, according to the National Journal.

“At the same time, fiscal decisions should take into account the fragility of the recovery.”

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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Friday, 20 Jul 2012 12:56 PM
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