NYU Professor Nouriel Roubini's Outlook on the Economy
Wednesday, July 22, 2009SUZANNE PRATT: Joining me now with his thoughts on health care and the economy is Nouriel Roubini. He is the economics professor at NYU's Stern School of Business, who forecasted the housing bubble way before everyone else. Professor Roubini, welcome back to NIGHTLY BUSINESS REPORT.
NOURIEL ROUBINI, ECONOMICS PROF., NYU STERN SCHOOL OF BUSINESS: Pleasure being with you tonight.
PRATT: I want to start with health care. What do you think if there is health care reform and we see something in the near future, it's likely to do to economic recovery in this country?
ROUBINI: We certainly need universal health care but we have to do it in a way that controls the fiscal costs. The new bill might cost $1.5 trillion over the next 10 years and I think it's critical to controlling costs. There are two ways of doing it. One is to make sure that the government negotiates with drug companies are reducing the cost of medicines and the second one is that the system currently gives an incentive to doctors who have too many test and procedures because they're paid based on that. Therefore we have also to control and change that system.
PRATT: So what is your forecast for the recovery right now? I've been hearing sub par growth. What exactly does that mean?
ROUBINI: First of all, in my view the recession is going to continue through the end of the year. It's not over yet, and while potential growth rate for the U.S. economy is 3 percent, I expect that the growth rate of the economy is going to be very anemic, below trend, then on 1 percent for the next two years. Why? You have U.S. consumers are shopped out, saving less debt burden. They're not going to consume very much. Your financial system is severely damaged, and credit growth is going to be limited, and now we have also this massive re-leveraging of the public sector with a large budget deficit and increases in public debt are going to eventually crowd out the economic recovery of the private sector. So I don't see a lot of economic growth ahead of us.
PRATT: Are you worried at all about a double-dip recession?
ROUBINI: Yeah, the risk is that by the end of the next year, if budget deficit remains very large, around $1.5 trillion, and if the Fed keep on monetizing them, essentially printing money to try to prevent increases in interest rates, expect that the inflation is going to go up, and if expecting inflation were to go up, long-term government bond yields would go up, and mortgage rates will go up. Borrowing costs for consumers (INAUDIBLE) will go up, and that's going to crowd out the recovery, so there's even a risk of a double-dip recession.
PRATT: How great a risk would you expect? I mean is there a percentage that you'd be willing to put it at?
ROUBINI: Well, that's going to depend on the decisions that are going to be made about exit strategies from these massive monetary easing and massive fiscal easing. It's going to be difficult because if you reduce the fiscal stimulus too much too soon, raising taxes, cut spending, the economy is weak, is going to tip into recession. If you wait too long and the deficit remains too large, then eventually the market's going to worry about rising inflation, rising deficits (INAUDIBLE) rates are going to go up, and you'll have recession again. So the timing and the sequencing and when to do it is going to be a very difficult policy proposition.
PRATT: If your economic projections are correct and I have to point out that they are below consensus, it would seem that the stock market may have gotten way ahead of itself here at the current levels. Do you agree with that?
ROUBINI: Yes. Some increase in stock prices are justified because we avoided the risk of a near depression. That was the risk we were facing in the first quarter. But markets have gone up too much, too soon based on economic fundamentals. If the recovery is going to be weaker, therefore profits are not going to recover as fast. If you are going to have still weaknesses in the rest of the world, Europe, Japan I think there will be downside risk for the stock market from this point on.
PRATT: So what are you looking with your money? Are you looking overseas or are you still looking for U.S. equities to do the best?
ROUBINI: Well, for the time being, I keep my money still in cash, because I think there are downside risk on equities, on credit, on foreign equities, on commodities. I think that there are downside risks, too many risky assets. It's better to wait until there are stronger signs of a more robust and resilient recovery before jumping into risky assets.
PRATT: What would you expect those stronger signs to be? What do you look for?
ROUBINI: Well, we have to look whether there's going to be any stabilization of the job market, but unfortunately I see unemployment rate well above 10 percent this year and close to 11 percent at the peak next year. We have to see a recovery of the U.S. consumer, but there's a massive weakness because of consumers being hit by default (ph) in the equity wealth, in this housing wealth, falling labor income, rising debt and debt servicing ratio (ph). That's why I'm somehow bearish about the recovery and I expect the recovery to occur anytime soon and that's going to be a negative for the markets.
PRATT: OK, some very interesting thoughts from you. Thank you very much for joining us.
ROUBINI: Pleasure being with you.
PRATT: My guest this evening Professor Nouriel Roubini.
