Housing Free Fall Turning into Meltdown...2007 Recession Ahead - Nouriel Roubini

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If you woke up this morning whistling and singing; with the world at your feet. If you just can't really seem to shake the feeling that the sun shines out of a certain part of your anatomy.... My friend, what you need is a dose of good Doctor Roubini's "Recession of 2007 - Elixir" to reorganize your organism. Try it and see. DS

Abstract: Now the housing recession is spreading to non residential construction. Until Q2 non residential construction investment was strong but it was only half the size of housing; but by now it is clear that non residential construction is also completely stalling; the figures for total construction spending for September show a sharp fall in residential construction and a stall of non residential construction. The reason for this contagion from residential to non residential construction is obvious: since we have now entire "ghost towns" in the West (a term used by SF Fed Prez Janet Yellen to describe many housing developments that are empty in the West) no one is going to build stores, shopping malls, shopping centers/strips, offices near these "ghost towns". Indeed, as reported in a recent lead article of the WSJ, a McGraw Hill Construction study forecasted sharp drops in non-residential construction in 2007 as lower housing leads to lower non residential construction. Indeed, the October figures for construction employment already show a fall of 26K, a fall that will accelerate in the next few months as housing construction now under completion is completed and then new starts will become sharply lower. So, the housing recession is now becoming a construction recession; and the construction recession is now turning into a clear auto and manufacturing recession; and the manufacturing recession will soon turn into a retail recession as squeezed households - facing falling home prices and rising mortgage servicing costs - sharply contract their rate of consumption. As I have predicted since July a recession in 2007 (as early as Q1 or at the latest by Q2) is now highly likely to occur. Expect the Fed to slash the Fed Funds rate as early as January and expect this Fed easing to fail to prevent the 2007 recession as the glut homes, autos, consumer durables will make the demand for these totally insensitive to changes in interest rates. The Fed easing in 2001 failed to prevent the 2001 recession and the Fed easing in 2007 will also fail to prevent the 2007 recession. Also expect this sucker rally in equity to continue for a while into the end of 2006 as expectations of a Fed easing will lead to the delusional hope that such easing will prevent the 2007 recession. But once the signals of a recession are clear to all by the beginning of 2007 expect, as in previous US recessions, for the stock market to experience a sharp contraction; as detailed in my research work, in the typical US recession the S&P500 has fallen by an average 28%. READ IT ALL