Monday :: Nov 20, 2006

Does the Housing Downturn Portend Recession?


by Mary

Last week's economic news that housing starts were at a 6 year low was greeted by Brad DeLong with one word: Gulp. The troubling news makes it more likely that the pessimists like Nouriel Roubini, who have warned that the housing market was a bubble and when it collapses it will lead to a recession, are right.

Lately Roubini has noted that many economic cheerleaders are saying that the dropping housing market is close to the bottom. However, he asserts they are talking total rubbish because there is much more coming. After all, this drop in the housing market is seeping into the broader economy.

So, the housing recession is now becoming a construction recession; and the construction recession is now turning into a clear auto and manufacturing recession; and the manufacturing recession will soon turn into a retail recession as squeezed households - facing falling home prices and rising mortgage servicing costs - sharply contract their rate of consumption. As I have predicted since July a recession in 2007 (as early as Q1 or at the latest by Q2) is now highly likely to occur. Expect the Fed to slash the Fed Funds rate as early as January and expect this Fed easing to fail to prevent the 2007 recession as the glut homes, autos, consumer durables will make the demand for these totally insensitive to changes in interest rates. The Fed easing in 2001 failed to prevent the 2001 recession and the Fed easing in 2007 will also fail to prevent the 2007 recession. Also expect this sucker rally in equity to continue for a while into the end of 2006 as expectations of a Fed easing will lead to the delusional hope that such easing will prevent the 2007 recession. But once the signals of a recession are clear to all by the beginning of 2007 expect, as in previous US recessions, for the stock market to experience a sharp contraction; as detailed in my research work, in the typical US recession the S&P500 has fallen by an average 28%.

The burden of the proof that we will not experience a hard landing recession in 2007 is now in the hands of the soft-landing optimists...

What about how consumers should have lots more to spend because of the low gas prices? According to Carolyn Baum at Bloomberg.com, the dropping (and now once more rising) gas prices haven't provided any real slack for consumers and she warns that the pain from a dropping housing market will continue for a while.

"If consumers are using the savings from the sharp fall in gasoline prices to purchase other items, overall sales should not be declining," says Joe Carson, director of economic research at AllianceBernstein LP in New York. "How are you going to get any nominal GDP when retail sales are falling?"

The average price of a gallon of regular gasoline was $2.232 last week, down from a record $3.038 in the first week of August, according to the U.S. Energy Department. The notion that the money saved topping the tank is finding its way into other goods isn't borne out by the facts.

"It's clearly not a one-for-one swap out of gas into everything else," says Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York. "The drop in spending on gas since July is $6.7 billion. Spending on everything else is up $2.9 billion. The housing malaise is starting to bite," he says.

Today came the news that housing prices fell in 38 states. So what did the Wall Street Journal say? That we should be seeing the worst of the housing market and the rest of the economy is holding up just fine. This indicates that the Journal continues to be as delusional about the real state of the economy as Bush is about his war.

Mary :: 7:30 PM :: Comments (9) :: Spotlight :: Digg It!