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Thread: Merrill Lynch's Rosenberg Says U.S. Economy Is on `Knife's Edge'

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    Default Merrill Lynch's Rosenberg Says U.S. Economy Is on `Knife's Edge'

    Rosenberg Says U.S. Economy Is on `Knife's Edge:' Chart of Day
    November 1, 2006 (Thomas R. Keene and Brendan Moynihan - Bloomberg)

    The U.S. economy is "on a knife's edge," and growth may slump to less than a 2 percent pace next year unless the Federal Reserve cuts interest rates, according to Merrill Lynch & Co. economists.

    "Our recession-risk indicator is now at 51 percent odds for an actual economic downturn in the coming year," writes David A. Rosenberg, chief North American economist at Merrill Lynch in New York, in a note today. The last time the indicator registered that high was in the recession year 2001. product growth, adjusted for inflation, compared with Rosenberg's forecast of 2 percent growth in 2007 (the blue line). The 10-year trend in real GDP growth is shown in green.

    Rosenberg says his forecast for next year is "predicated on the Fed cutting rates to 4 percent next year" from the current 5.25 percent.

    Without that stimulus, growth could well be closer to a 1 percent to 1.5 percent range,'' he says. That's "weak enough to be considered in the 'hard-landing' zone," he says.

    AntiSpin: That's more optimistic than my prediction: 90% chance of an "official" recession by Q2 2007, with several industries and regions of the US already in recession and others entering. An "official" recession is two quarters of negative GDP growth. Assuming you believe the GDP numbers, which lately appear to be flip-flopping faster than a politician's positions the week before an election.

    Can there be any doubt that the housing industry has gone from seizing up to a "bust rate of decline" that is "significantly more rapid than the boom rate of growth"?

    So far, so predictable. There will be plenty of surprises as our madcap, Frankenstein economy goes into recession, but the only surprise so far is that newly built unsold housing is hitting Step C a year ahead of schedule for sales of existing housing.
    As transaction volumes continue to fall, demand for housing-related employment will decline too. The first signs of labor market distress will start to show up, as more and more of that 43% of the private sector who found jobs in the housing industry are no longer needed. Coincidentally, major employers—such as the U.S. auto industry—will be going through major restructuring, adding to pressures on housing prices in some areas. Some home owners will need to sell at a loss in order to move to regions of the country where the labor picture is better, and will do this if they have enough equity and are not paying cash out of pocket to cover their remaining mortgage obligations. These sales will further depress home prices.
    As if on cue:
    U.S. Factory Growth Slowest In 3 Years On Housing, Autos
    November 1, 2006 (SCOTT STODDARD - INVESTOR'S BUSINESS DAILY)


    It is the latest in a series of weak reports raising concerns that the economy may be slowing too fast. That spurred a sharp slide in stocks and bond yields.
    Which leads us to Rosenberg's prediction of 4% interest rates. Yield curves are inverted globally. Gold prices are rising even as oil and gas prices plummet? What gives?

    Stay tuned, as they say on the late night news.
    Last edited by FRED; 11-01-06 at 10:16 PM.

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