Roubini: 2009 will be very very bleak:
So how far are we into this recession that has already lasted longer than the previous two (the 1990 and 2001 recessions lasted eight months each)? I believe the U.S. economy is only half way through a recession that will be the longest and most severe in the post-war period. U.S. gross domestic product will continue to contract throughout 2009 for a cumulative output loss of 5% and a recession that will last close to two years.
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The wealth losses for households related to the fall in home prices are roughly $4 trillion so far, and are clearly bound to increase further as home prices continue to fall–eventually reaching the $6-8 trillion range (compatible with a 30-40% fall in home prices peak to trough). With a negative wealth effect of 6 cents on the dollar, the reduction in personal consumption could amount to a whopping $500 billion. And negative wealth effect from fall in equity prices–on the wake of a bleak 2009 for corporate profits–will also contribute to the contraction in personal consumption by an estimated $100 billion (compatible with a 25% contraction in the stock markets).
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I see [housing] starts falling another 20% from current levels and believe that home prices will not bottom out until the middle of 2010.
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Layoffs are bound to continue thereafter as cost-cutting gains pace with the beginning of the (sluggish) recovery period in early 2010. Even as consumer demand might show some signs of recovery, firms, as in the past, will begin by hiring only part-time and temporary workers initially. The unemployment rate might peak at close to 9% in Q1 2010, almost two years after the recession began. However, the hiring freeze across industries that began in late 2007 will continue at least until 2010, causing discouraged workers to leave the work force and containing the extent of the spike in the unemployment rate.
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Back in February 2008, I warned that the credit losses of this financial crisis would amount to at least $1 trillion and most likely closer to $2 trillion. As of mid-November 2008, the threshold of $1 trillion in global financial write-downs was finally reached. Given that national house prices are expected to drop another 20%, we expect credit losses of $1.6 trillion.
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I see meaningful downside risks to stock prices as bad macro news–worse than expected–continues to dominate in 2009. Using the S&P 500 as the benchmark, earnings per share will stay in the $50 to $60 range–and earnings will fall further. If–and it is not unusual during recessions–the price-to-earnings ratio falls in the 12 to 14 range, we could see another 25% slide in stock prices.
Very bleak indeed.
