Roubini: 'Worst' Recession in Decades Ahead

Wednesday, July 23, 2008 8:30 AM

The U.S. is in for the "worst" recession in decades, one that may well be more severe than the downturn that followed the stock market bubble in 2001 and the savings and loan crisis of 1991, says Nouriel Roubini, former Clinton White House economist.

In an interview with Bloomberg, Roubini, now a university professor, says the recession will be a result of a downturn in consumer spending.

Roubini says the remarkable rally of financial stocks when better than expected results from Wells Fargo, JPMorgan, and Citi soothed the fears that major financial institutions were in even more distress than market analysts predicted "is just another temporary bear market rally that will fizzle away once the onslaught of bad financial and macro news builds up again."

The condition of financial firms and banks are much worse than the news suggests. When the additional bad news comes out, the U.S. will experience a systemic financial crisis, he says.

Here's why Roubini thinks that is likely, if not probable:

"Since residential investment is only 5 percent of even a worsening housing market, recession cannot – by itself – trigger an economy-wide recession," said Roubini. "Rather, since private consumption is over 70 percent of aggregate demand, a sharp and persistent slowdown in consumption growth — below 1 percent or even negative — is necessary to trigger a full-blown recession."

Roubini says that evidence is mounting that debt-burdened consumers may have reached the tipping point, as energy and food costs soar.

"A sharp slowdown in consumption growth will be the last straw that will trigger an economy-wide recession," he says.

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