From
Nouriel Roubini's Rgemonitor:
I have been saying for a while that in 2006 Three Ugly Bears will scare the growth Goldilocks in the US and abroad. The Three Bears are: first, higher inflation -both core and headline - leading to higher interest rates in the US and the rest of the world; the era of cheap money feeding asset bubbles is over. Second, an oil and commodity price shock that is stagflationary for both the US and all other oil importing countries. Third, the fizzling out - to avoid saying bursting - of the housing bubble in the US and in many other economies where this bubble fermented for too long via the drug of easy liquidity.
The US consumer is altogether shopped out, over-indebted, with negative savings and now bombarded with high oil prices, fluttering housing and rising short and long rates. The poor consumer also suffers from a slumping labor market generating a pathetically low number of jobs, flat real wages and suffering of the redistribution of income from labor to capital (as the profit share of the economy has surged); on top of it all, the equity market downturn has negative wealth and consumer confidence effects. Thus, real consumption growth in Q2 will be a meager 2% and, since consumption is 70% of consumption, Q2 growth will be at best 2.5% and falling towards 2% - if not lower - by Q4.
The latest GDP report stated inflation is rising at its fastest pace in 10 years:
Meanwhile, core consumer prices rose 2.9%, the fastest pace in 12 years. Core consumer prices have risen 2.3% in the past year, the fastest growth since 1995.
From Federal Reserve Chairman Bernanke's recent testimony before Congress:
I turn now to the inflation situation. As I noted, inflation has been higher than we expected at the time of our last report. Much of the upward pressure on overall inflation this year has been due to increases in the prices of energy and other commodities and, in particular, to the higher prices of products derived from crude oil. Gasoline prices have increased notably as a result of the rise in petroleum prices as well as factors specific to the market for ethanol. The pickup in inflation so far this year has also been reflected in the prices of a range of non-energy goods and services, as strengthening demand may have given firms more ability to pass energy and other costs through to consumers. In addition, increases in residential rents, as well as in the imputed rent on owner-occupied homes, have recently contributed to higher core inflation.
The recent rise in inflation is of concern to the FOMC. The achievement of price stability is one of the objectives that make up the Congress's mandate to the Federal Reserve. Moreover, in the long run, price stability is critical to achieving maximum employment and moderate long-term interest rates, the other parts of the congressional mandate.
Bernanke went on to say the Fed's projections call for lower inflation. However, that was before the GDP report mentioned above.
As for oil's price, here is a weekly chart going back to 1998 (courtesy of Futures Trading Charts):
(In case you are wondering, this is what a bull market looks like)
Housing
From Goldman Sachs:
HOUSE prices are set to drop in the US for the first time on record, US investment bank Goldman Sachs warned this weekend.
Prices in several segments of the market have already started to fall, and the overall market will move into the red even in nominal terms next year, fuelling fears that this will trigger a downturn in consumer spending and hit an already slowing US economy.
Jan Hatzius, economist at Goldman Sachs, said: "The risk is rising that nominal US home prices may be headed for an outright decline in 2007. It would be the first decline in national home prices ever recorded, at least in nominal terms."
In real terms, prices have declined during several periods, including a 9% drop from 1979 to 1984.
In a special analysis of the data, the Goldman economists found that seasonally adjusted US house prices were already falling in dollar terms. The nominal median price of a single-family home has been declining slightly at a 1% annualised rate since the fourth quarter of 2005, the research shows.
The median price of a condo or co-op apartment has been falling more steeply at a 9% annual rate. Hatzius said: "It is not surprising to see relatively greater weakness in the condo and co-op market, which is much more concentrated in overheated coastal parts of the United States".
Asking prices, according to the real estate brokers' multiple listing services, are also weak. Goldman's proprietary database covering 52 regional markets shows that, on a population-weighted basis, the median asking price is up only about 2% since last summer.
The following is from Mish's Economics Blog. It is a realtor's perspective on the Atlanta housing market over the last 6 months. I have only included the first and last paragraphs for brevity's sake.
(From January 4, 2006) We are seeing an extremely high level of relocation activity. Our business last year was very solid, we closed twenty six transactions. So far this year, days into the year, we have two transactions pending, booked in the fourth quarter, plus twenty five prospects. If only two thirds of those prospects close, then we already have eighteen or so deals. They are evenly split, buyers and sellers, but much more importantly, nineteen involve relocations. This is a very high level of relocation activity, the highest we have seen in years.
(From July 20, 2006) Most of the regulars here know that my wife and I are a Realtor team associated with one of the major national firms here on Atlanta's north side, out in Roswell and Alpharetta. It's been a "character building year" as another agent in our office put it the other day. What makes it more stunning, at least to me, is that it started out so well. We ended the first quarter with nine deals pending or closed, which is a very solid start. Then we hit a brick wall with only three deals in the second quarter and that would make it our worst second quarter ever in our twelve years.
Then it got worse. Normally, over the years, about one in fifteen deals fall out, that is, they fail to close. Usually it's over the inspection contingency amendment but not always. At any rate, two of our three second quarter contracts failed to close. Unbelievably we booked and closed only one contract in the second quarter. So here we are, July 20th, with only ten deals for the year. What a mess.
As for the consumer being tapped out and overly indebted, here are three charts from Prudent Bear:
Total consumer debt outstanding:
Mortgage Borowing:
Household Debt as a Percent of Assets:
I don't like calling exact times for economic events; there are way too many variables to consider. However, Roubini makes a compelling case for a recession occurring by year end. He just may be right.