Worth Reading, 20060726
Why Oh Why Can't We Have a Better Press Corps?

Nouriel Roubini Forecasts Recession

RGE - Google News Barometer on Recession and Stagflation Risks...and A Few Simple Questions to Chairman Bernanke...: It is hard to predict with certainty whether the U.S. and global economy will suffer of serious stagflation or even a recession (my bearish views are fleshed out in my recent blogs here and here). I have been arguing that those risks are large and rising; and I have recently argued that the probability of a US recession in 2007 is, in my view, as high as 50%. In brief, the Three Bears of high oil prices, rising inflation leading to higher policy rates, and a slumping housing markets will derail the Goldilocks (of high growth and low inflation) and trigger a sharp U.S. slowdown in 2006, that may turn into a recession in 2007.

One potential barometer of such recession concerns - with all the appropriate caveats - is how many news articles are citing terms such as stagflation, U.S. recession, or recession in general.... [I]t is not just obscure publications that are worrying about stagflation and recession. Recent detailed discussions of such risks were recently front page on the WSJ and on Bloomberg. And the number of private sector folks, experts and academics talking about such risks is rising. The authoritative Mike Mussa, former Chief Economist at the IMF, now puts the odds of a US recession at 25-30% while the Fed's own internal yield curve model now predicts that the probability of a U.S. recession in 2007 is almost 40%. As the proverb says, talk is cheap (if so sweet) but in this case the evidence that many folks and leading media publications are increasingly and systematically talking about recession and stagflation to the tune of 1000s of recent articles and commentaries should be at least a signal, to policy makers and market folks, that these risks may be rising (and the talk is no sweet).

Fed Chairman Bernanke is downplaying the risks of a recessions but many out there are starting to worry about it a lot. The Fed may also want to learn from its previous serious forecasting mistakes. In 2000, it took six months for the U.S. to go from overheating into outright recession: in Q2 of 2000 the economy was growing at an annualized rate of over 5% and it slowed down to close to 0% by Q4 and entered into an outright recession by Q1 of 2001. As late as September 2000, Fed discussions - see their Minutes - were showing the FOMC being mostly clueless about the upcoming recession and still worrying more about the alleged rising inflation (with their view of the balance of risks stressing rising inflation rather than slowing growth). It then took a suprising and lousy Chrismas season of sales and a crashing Nasdaq at the beginning of the new year session on January 2nd 2001 to get the Fed into reality check, panic mode and start reducing the Fed Funds rate at an exceptional inter-FOMC meeting point.

And in 2000, the triggers for the recession were suprisingly similar to 2006: then a tech sector investment bust (now a real estate sector bust); then a Fed tigthening of 175bps (between June 1999 and June 2000), now a 425bps (soon 450bps) tigthening; then a modest oil shock (with oil rising from low teens to high teens in 2000 on the basis of Mid-East tensions and the beginning of the second intifada), now oil rising from $ 20 to 40 to 60 to 75 (and soon enough to 80) on the wave of much more serious Mid-East tensions (Israel conflict with Palestinians and Lebanon, growing security mess in Iraq, rising risks of a confrontation with Iran on the nuclear proliferation issue); then, there were worries - mostly unfounded in reality - on the risks of rising inflation, while now there are much more serious real worries (in spite of Bernanke's latest flip-flop on the issue, to cite Steve Roach today) on a truly rising inflation rate (see also WSJ's Greg Ip on Bernanke keep on saying one thing and doing another for the last few months; so much for Fed transparency and consistency of its communication strategy).

So, why does Bernanke believe that a "U.S. recession is not likely?" Why are things better now than in 2000 when all indicators show similar vulnerabilities but only more severe and scary ones now than in 2000?...

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