"100% chance of a recession in the next year"
December 27, 2007
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Anyone buying real estate and stocks might want to google recession before they make that purchase. Taken from www.garynorth.com:
John Mauldin recently quoted David Rosenberg, chief economist for North America for Merrill "We're bullish on America" Lynch.
We recently unveiled a new recession probability indicator that uses the shape of the yield curve (10-year note/3-month LIBOR) and corporate spreads (Baa) to predict the probability of a recession within the next 12 months. (The model is based on a recent Fed paper, which used the 10/2-year yield curve and Aa spreads.) The results are striking: taking into account corporate spreads, the model is flashing a 100% chance of a recession in the next year, up from 75% in October and essentially zero in the summer. Looking at history, the model did a pretty good job predicting the 1990-91 and 2001 recessions. In December 1989, recession odds jumped to 95%, and by August 1990 an official recession had set in. Similarly, the model was showing 100% recession odds in October 2000; by September 2001, the economy was in an official downturn.
http://www.frontlinethoughts.com/pdf/mwo122107.pdf Even more graphic are his words, quoted by the London Telegraph (Dec. 5).
Merrill Lynch's North America economist David Rosenberg presented an almost unremittingly gloomy forecast for the US economy next year. "The US consumer is on the precipice of experiencing its first recessionary phase since 1991 - the last time we had the combination of high, punishing energy prices; weakening employment conditions; real estate deflation and tightening credit conditions" he said.
The only ray of light is in America's export sector, which Mr Rosenberg said was "literally booming" as a result of the plunging dollar and still strong growth in the rest of the world. Merrill said investors should play the ongoing shift in economic power in the world by investing in US exporters and companies serving the fast-expanding domestic economies of emerging markets.
Mr Rosenberg said high energy prices alone would drain 1.5 percentage points from American economic growth and he warned that gasoline prices of more than $3 a gallon were the equivalent of a 1pc wage cut across the US economy, "just in time for the holiday season".
He said growth in employment had halved compared with a year ago and warned that only three sectors - the government, health and leisure - were still creating jobs. The rest of the economy, accounting for 60pc of all employment, had shed 50,000 jobs in the past two months.
On the housing market, Merrill warned that the supply of unsold new homes had doubled compared with the recent boom years, while sales of second-hand homes had fallen by 30pc.
"We reiterate that real estate deflations are unique and have never ended well for the consumer, the credit market or the economy. We can identify only five periods post WWII when the real value of housing assets turned negative on a year-on-year basis. All of these time periods inevitably included a consumer downturn. Maybe it will be different this time, but we fail to see why," Mr Rosenberg concluded.
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