Roubini Goes Happy Face

Well, I for one am shocked, but there you are. Noriel Roubini was quoted as basically saying the worst is behind us, and that unlike his dire predictions last month, we may be in a general bottom now.

Roubini, of RGE Global Monitor, still warned that the US may need a second fiscal stimulus package of up to $250 billion around the end of the year to boost the deteriorating labor market, Reuters reported.

The stimulus "cannot be too small, but it cannot be too large," Roubini said, or financial markets will become too worried about the sustainability of the U.S. debt.

But he also signaled that economic and the financial crisis may not get any worse, contrary to his warning last month that there could be another downturn toward the end of next year.

Now, that's still not great news. Another 12-18 months of where we are right now, and we're looking at a long, slow, brutal recovery. But Roubini seems to suggest we're no longer in for that "W" shaped double-dip recession. I'm not buying it, I think CNBC is overestimating what counts as "happy" for Roubini, especially after what he said yesterday.

Recent data suggest that job market conditions are not improving in the United States and other advanced economies. In the U.S., the unemployment rate, currently at 9.5%, is poised to rise above 10% by the fall. It should peak at 11% some time in 2010 and remain well above 10% for a long time. The unemployment rate will peak above 10% in most other advanced economies (especially Europe and Japan), too, where social safety nets are broader and thus leading to less short term job losses and pain, but where the effects of the crisis on growth have been even more severe than the U.S.

But these raw figures on job losses, bad as they are, actually understate the weakness in world labor markets. If you include partially employed workers and discouraged workers who left the U.S. labor force, for example, the unemployment rate is already 16.5%; even temporary employment is sharply down. Monetary and fiscal stimulus in most countries has done little to slow down the rate of job losses as economies suffer from problems of insolvency, not just illiquidity, and as the fiscal stimulus programs are too small and not labor intensive enough. As a result, total labor income – the product of jobs times hours worked times average hourly wages – has fallen dramatically.

Moreover, many employers, seeking to “share the pain” of the recession and slow down the rate of layoffs, are now asking workers to accept cuts in both hours and hourly wages. Thus, the total effect of the recession on labor income of jobs, hours and wage reductions is much larger.

Other indicators are suggesting a protracted period of job losses and a persistently high unemployment rate even after the recession is over. The average duration of unemployment is not at an all time high in the U.S. Many manufacturing sectors are on a secular decline (autos, etc.) and employers are shedding jobs on a permanent basis; employment in the previously bubbly sectors (housing and related housing/real estate services, banking and financial services) is falling sharply and will not recover for a long time. The process of offshore outsourcing of both blue collar and white collar jobs is still in full swing. A lot of the job losses in the U.S. and in other advanced economies are structural rather than cyclical; many jobs will never come back.

So, even if the actual technical recession is over, and the worst-case scenario has not come to pass, the reality is we're going to be in serious economic doldrums into 2012 at the minimum, and possibly a lot longer. It's Jimmy Carter's malaise, only on steroids and riding a tyrannosaurus.

The argument is that putting together a social safety net now when it is going to be the most needed is prudent on a national level, but many states are doing the opposite because they simply can't afford it and can't do deficit spending.

Something's going to have to give here soon. Rather than a short, fatal drop of a sudden car crash, we're facing the long dark winter of stagflation where deflation now will mask many of the real problems we'll be facing in the next decade.

As Roubini says, we're in a "damned if we do, damned if we don't" scenario.

[UPDATE 5:24 PM] Hey look, I called that one. CNBC is now reporting that Roubini has said his outlook on the economy has not changed. This could get interesting, as Roubini's comments did cause the major stock indicies to rise in this afternoon.

Nouriel Roubini, the economist whose dire forecasts earned him the nickname "Doctor Doom," said after markets closed Thursday that earlier reports claiming he sees an end to the recession this year were "taken out of context."

"It has been widely reported today that I have stated that the recession will be over 'this year' and that I have 'improved' my economic outlook," Roubini said in a prepared statement. "Despite those reports ... my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context."

My, this is going to get messy.