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Roubini: The Bad News? The 'Good News' Isn’t Real

Tuesday, 17 January 2012 08:28 AM

Don't believe the recent good news about the U.S. economy, says New York University economist Nouriel Roubini: U.S. growth will be anemic in 2012.

"U.S. consumers remain income-challenged, wealth-challenged, and debt-constrained," Roubini wrote at slate.com.

"Disposable income has been growing modestly — despite real-wage stagnation — mostly as a result of tax cuts and transfer payments," he wrote.

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"This is not sustainable: Eventually, transfer payments will have to be reduced and taxes raised to reduce the fiscal deficit. Recent consumption data are already weakening relative to a couple of months ago, marked by holiday retail sales that were merely passable," he wrote.

At the same time, Roubini wrote, U.S. job growth is still too mediocre to make a dent in the overall unemployment rate and on labor income.

“The United States needs to create at least 150,000 jobs a month on a consistent basis just to stabilize the unemployment rate,” Roubini says.

“More than 40 percent of the unemployed are now long-term unemployed, which reduces their chances of ever regaining a decent job. Indeed, firms are still trying to find ways to slash labor costs.”

Roubini says that rising income inequality will also constrain consumption growth, as income shares shift from workers and the less wealthy to those corporate firms and wealthy households.

Moreover, the recent bounce in investment spending will end as tax benefits expire, firms wait out “tail risks” and insufficient final demand holds down capacity-utilization rates.

Housing remains comatose after six years, says Roubini.

“With demand for new homes having fallen by 80 percent relative to the peak, the downward price adjustment is likely to continue in 2012 as the supply of new and existing homes continues to exceed demand,” he says, and the vicious cycle of foreclosures and lower prices is likely to continue.

“America's only chance to move closer to its potential growth rate would be to reduce its large trade deficit,” says Roubini. “But net exports will be a drag on growth in 2012.”

“Given these risks, businesses, consumers, and investors have a strong incentive to wait and do little,” Roubini says. “The problem, of course, is that when enough people wait and don’t act, they heighten the very risks that they are trying to avoid.”

According to actionforex.com, the U.S. trade gap widened in November, pointing to net exports acting as a small drag on fourth-quarter 2011.

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Tuesday, 17 January 2012 08:28 AM
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