Since 2004, NYU Economics Professor and Chairman of RGE Monitor Nouriel Roubini has been pounding the drum on a severe recession caused by over-leveraging of consumers and financial institutions. Now that the fallout from over-leveraging has played out, more people are listening to him, and now he’s reiterating the recession projections. He recently published 20 reasons why consumers are in trouble and why this may lead to a deep recession. Below are the first few, and here’s a link to the rest. You can also click the Nouriel Roubini tag below for more:
- The US consumer is shopped-out having spent for the last few years well above its means.
- The US consumer is saving-less as the already low household savings rate at the beginning of this decade went to zero/negative by 2006 and has now to raise to more sustainable levels.
- The US consumer is debt burdened with the debt to disposable income having increased from 70% in the early 1990s to 100% in 2000 and to 140% in 2008.
- Not only debt ratios are high and rising but debt servicing ratios are also high and rising having gone from 11% in 2000 to almost 15% now as the interest rate on mortgages and consumer debt is resetting at higher levels.
- The value of housing wealth is now sharply falling by over $6 trillion as home price depreciation will soon be 30% and reach a cumulative fall of over 40% by 2010. Recent estimates of this wealth effect suggest that the effect may be closer to 12-14% rather than the historical 5-7%. And with home prices falling over 30% about 40% of all households with a mortgage (or 21 million out of 50 who have a mortgage) will be under water (negative equity in their homes) with a huge incentive to walk away from their homes.
- Mortgage equity withdrawal (MEW) is collapsing from $700 billion annualized in 2005 to less than $20 in Q2 of this year. Thus, with falling housing wealth and collapsing MEH US households cannot use their homes anymore as ATM machines borrowing against them.
- The value of the equity wealth of US households has fallen by almost 50%, another ugly wealth effect on consumption.
- The credit crunch is becoming more severe as the recent Q2 flow of funds data and the Fed Loan Officers’ Survey suggests: it is spreading from sub-prime to near prime to prime mortgages and home equity loans; and from mortgages to credit cards, auto loans and student loans. Both the price and the quantity of credit are sharply tightening.
- Consumer confidence is down to levels not seen since the 1973-75 and 1980-82 recessions.
- Real wage growth and real income growth has been stagnant in the last few years as income and wealth inequality has been rising. And now with GDP and real incomes falling real consumption will fall sharply.