One on One with David Rosenberg, Chief North American Economist for Merrill Lynch
Thursday, January 31, 2008
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SUSIE GHARIB: My guest tonight is one of Wall Street's most prominent and pessimistic economists and he was one of the first to forecast a recession for the U.S. economy. He's David Rosenberg, chief North American economist for Merrill Lynch. A short while ago, I sat down with Rosenberg at Merrill's New York headquarters and asked him to describe current economic conditions.
DAVID ROSENBERG, CHIEF NORTH AMERICAN ECONOMIST, MERRILL LYNCH: I think right now we're heading into a classic recession phase. I know it doesn't make for a nice cocktail conversation to talk about a recession. But there have been as many expansions since the civil war, there have been 32 of them, and there's been as many recessions as there's been expansions. They are joined at the hip and so I think right now we are seeing the classic signs, you are taking a look at the strains in the labor market. You're taking a look at the acceleration in consumer spending and of course this relentless decline in home prices, it's all coalescing right now into a very weak economic environment.
GHARIB: Do you think that tomorrow's employment report is going to confirm your assessment?
ROSENBERG: Employment is not a leading indicator of the economy for investors on the show. Employment is the last thing to start to roll over. I think employment numbers should be OK. It's not going to be strong. It's not going to be that weak but I think that in the next three, four, five months we're going to see much more evidence of the strains hitting the labor market.
GHARIB: David for some time now you've been forecasting a recession for the U.S. economy. Are you going to be revising that, given low- interest rates from the Fed and tax rebates from Washington?
ROSENBERG: I think it is too late. I think that the recession is already starting. I think everything they're doing right now, interest rate cuts, the fiscal stimulus is going to help provide some underpinning, but I don't think it's going to prevent a recession. And let's remember that monetary policy operates with a long lag and so what the Fed is doing right now is probably going to be seen hitting a maximum impact on the economy in 2009.
GHARIB: So this recession that you are forecasting, is it going to be short or is it going to be long and painful?
ROSENBERG: The recession itself, the technical recession may well be short. We had a short recession in 1990. We had a short recession in 2001. But even after the recession was over, it still felt like the recession for a lot of people, even though the technical recession in terms of declining GDP was over. I think that we basically have in our hands the worst residential real estate market since the 1930s. House prices are going down. We have a million residential housing units, single family condominiums on the market for sale that aren't selling. That is going to put relentless downward pressure on home prices and that's going to make 70 percent of the public that own a home feel poor. That is going to have an impact on their consumer spending habits.
GHARIB: But many people are hoping that all these moves are going to benefit the housing sector. People are going to go out and get mortgages or they're going to refinance their mortgages. Isn't this the medicine to reverse the housing downturn?
ROSENBERG: Well, the interest rate cuts are going to help in some respects. For example, if you are rolling over a mortgage or you're renewing a mortgage, you can do it at lower interest rates. But lower interest rates are not going to compel the banks to start lending money again at a time when they are facing delinquency rates, default rates going up in all the other loans they made during the cycle. Right now the banks are pulling back.
GHARIB: A lot of concerns today about the stability of bond insurers. Is the big loss at MBIA a contained situation or could it be a sign of something bigger that's going on and it could impact the economy?
ROSENBERG: This is obviously a destabilizing situation enough that, you know, the head New York State insurance regulator, you know, wants to cobble together some sort of bailout plan. It is once again one of the skeletons that comes out of the closet. You know, one month we're talking about sub-prime. Another month we're talking about CDOs. Another month we are talking about monolines. Now we are starting to see commercial real estate follow residential real estate, but I think it is a very important situation, yes, it is. And hopefully there is going to be a solution in terms of recapitalizing these institutions.
GHARIB: David, where do you stand on this whole inflation debate? Do you think that these low interest rates can ultimately trigger inflation?
ROSENBERG: I doubt it. I think right now we have a situation where the unemployment rate is going up. Industry operating rates are going down. The inflation story all along was in commodities and that was not a story about an overheated U.S. economy. It was a story about the voracious appetite for food and for energy and industrial commodities coming out of Asia, primarily China.
GHARIB: So what happens next? Do you see the Fed cutting rates more from here?
ROSENBERG: Absolutely. Well, I mean they told us they are going to cut rates. And anybody who studied recessions knows that the interest rate increases in the previous cycle are completely unwound in the next cycle. So I think you can see the fund rate's going to go down to 1 or 2 percent. This is right now all about promoting economic growth which is what we talked about earlier, but it is to the going to happen immediately. So yeah, I think that rates are going to come down and come down a lot from here.
GHARIB: Then when do you see the economy turning around?
ROSENBERG: I think we will be through the worst of this by the end of the year and I think next year is going to be a recovery but a very weak one like we had in 1992 and 2002.
GHARIB: David, thank you very much for your time.
ROSENBERG: Thank you for inviting me.
