Sure, on a relative basis the economy–and certainly the equity markets–are looking better than they have in some time. Much like the patient who feels euphoric as soon as the stomach virus abates. But Roubini is concerned that the economic recovery he calls "anemic"–a word he used over and over–may be short lived. Macro-economic fundamentals, he says, could make the economy in first half of this year appear to be "rosier" than it really is, "due to temporary fiscal stimulus," the "restocking of inventory," a reappearance of "momentum trading," and the accompanying rise in the prices of "risky assets."
But the second half of 2010 may bring downside surprises, with the possibility of a double-dip recession. Why? "Unemployment," he says. Capacity glut: "Why would firms want to spend on capacity when there's an enormous glut?" The financial system and credit markets are still damaged–with "130 banks shut down…500 on the [endangered] list," so there's no real "credit creation." In other words, "how [do you] finance, consumption, construction," basic engines for growth–without lending? Consumers are still not spending–they're still unwinding leverage, saving, Roubini adds. Then there's the potential need for additional stimulus–which could be politically difficult, to say the least, and a "drag on economic activity."
The stimulus may become a "drag," he says, with "top-line revenue not growing fast," enough, and "deflation." But why, after the last two-plus years, wouldn't top-line revenue grow fast enough? Look at the way companies got through the recession, Roubini advises, by "slashing costs." That's "not rational, not sustainable." Companies may now be stuck because deflation will, "prevent them from increasing prices and revenues." He predicts the "anemic" GDP in the U.S. to be 2% or 3%. "Earnings," Roubini asserts, "cannot grow at 30% if GDP is 2% or 3%."
Roubini is very concerned about unemployment, which at 10% he calls "bleak." He adds that "job losses were significant in December," and that the U.S. needs to add new jobs at a rate of "150,000 per month, just to absorb the new labor force." He expects that the unemployment rate "could rise to 11%." It's not simply the high rate of unemployment, however. He says there are 7.5 million fewer jobs since the beginning of the crisis, and adds that the weakened labor force, hit by furloughs and lost hours of work, has lost the equivalent of another 3 million jobs, bringing the total to 10.5 million lost jobs. How do you bring back consumption–some 70% of the GDP in the U.S.–with the labor pool that much smaller? And how do you sustainably grow GDP without that consumption?
On inflation, Roubini noted that right now, he doesn't see inflation as a threat for the U.S. and Eurozone. "Demand is below supply…there is excess inventory, [and therefore] no pricing power. [Companies have to] reduce prices to get rid of inventory."
