'Lots of people are going to suffer': Nouriel Roubini on the possibility of a double dip recession and its impact on the labor market
Nouriel Roubini, professor of economics at New York University’s Stern School of Business and CEO of Roubini Macro Associates, joined Yahoo Finance LIve to discuss how the election results will impact the economy and his outlook for the labor market.
Video Transcript
ADAM SHAPIRO: Let’s talk about all of this, as well as the economic data that we are getting. And we’re going to do that with two important people here at Yahoo Finance. First, we welcome into the stream Professor Nouriel Roubini. He is professor of economics at New York University’s Stern School of Business. He is also the CEO of Roubini Macro Associates LLC.
We also welcome back Julia La Roche. She is a correspondent here at Yahoo Finance. She has actually invited Dr. Roubini to join us. I’m going to throw it to you, Julia, to lead off the question.
JULIA LA ROCHE: Thank you so much, Adam. And Nouriel, it’s great to have you on as always. A lot to unpack here. You put out a piece ahead of the election, it was pretty prescient. So would love to kind of explore your views as to what’s transpired here– transpired here. And what are the complications for the economy?
NOURIEL ROUBINI: Well, it looks like it’s going to be divided government, with Biden most likely winning the White House. But the Senate may remain Republican, unless those two runoff elections in early January in Georgia would be to a 50-50. In which case, Kamala Harris could break the tie.
But I would say for now that doesn’t look likely. Now, in terms of the economy, implies that, of course, the amount of fiscal stimulus is not going to be as large as the one that you would have had under a blue wave. Biden wanted over $2 trillion of a stimulus, plus another 2 trillion of spending on infrastructure in the Green New Deal over the next four years.
So in the short run, of course, this week the stock market rallied because they believed that divided government is good. And why they believe it is divided government is good because Biden wanted to increase taxes, corporate taxes from 21% to 28%, close a bunch of loopholes, especially on foreign profits of Big Tech and pharma, raise taxes personal income on those that are wealthy, about 400,000, and increase the capital gains tax.
So in the short run, divided government implies that you have less fiscal stimulus, and you don’t have a tax increase. However, in my view, the economy is weakening. We have forgotten this week that we have 120,000 new cases of COVID every day. And in the case of Europe, my estimate is that we have the rise of cases in Europe, Europe is already going into a double-dip recession in the fourth quarter and the first quarter of this year.
I think at this point, with the new lockdowns you’re seeing in Europe, we’re going to see a double-dip recession in Europe. In the United States, even if you don’t have draconian lockdowns like those they’re going to have in Europe, the endogenous behavior of the private sector when you have rising COVID cases means people are more risk averse, more uncertain, they spend less, they save more, they do less cutbacks, they’ll do less employment.
So we’re going to see that while the third quarter look like a V-shaped recovery, 33%, the fourth quarter is going to be barely 2%, even less than that. And that’s annualized, means that within the quarter, the growth is 0.5 where you’re at 2% annualized. So I think that actually the economy is to be weakening because you don’t get enough of fiscal stimulus that you need.
And that could be bearing negatively on the market over time, not in the short run, but over time once we realize that we’re having a V that becomes more like a U with a risk of a double-dip recession.
JULIA LA ROCHE: OK, so a few things there. It looks like, in your view, we could get less fiscal stimulus. You also talked about the rise in COVID cases in Europe. Some of that economic data out of Europe already starting to roll over. And then, of course, the rise in cases here in the US and outlining your view of the economy of a double-dip here.
When we’ve talked several months ago, we’ve talked about this kind of risk of a greater depression. And I know you have brought up various letters, and I believe the last time, it was a double-dip recession was the risk that you saw. Nouriel, when you look at that, I guess that would be the W shape, does the latter half of that, could that be worse than the first dip we saw? Would like to kind of double click on that as well.
NOURIEL ROUBINI: Well, you know, the freefall that we had in the first quarter and the second quarter this year was massive. Because we had to shut down economic activity altogether, first in China, then in Europe, then US, then globally, in order to flatten the curve and reduce the spreads of the virus. Then we had a very sharp recovery in the third quarter.
Even if we had a slowdown or even a double-dip, in my view, we’re not going to have the freefall of economic activity we had in the first and the second quarter of this year. But, you know, whether it’s going to be a mediocre or anemic view, with unemployment rate remaining high and the massive defaults and bankruptcies, or whether it’s going to be something more severe, like a double-dip recession, the difference is relatively small.
Meaning, we’re not going to have 30% growth anymore. It was just a one quarter event. Because after a freefall in this second quarter, we had a recovery and an annualized rate that looked like 30, even if within the quarter it was only 7%. But I expect– I mean, my baseline, a mediocre, anemic, subpar, below trend recovery that means that lots of people are going to suffer.
Let’s not forget that still over 10 million people that lost jobs in March and April who have not regained those jobs. And once there again jobs, they’re going to be part-time gig workers without full benefits, low wages, freelancers, contractors. Corporate sector wants to have flexibility. That means that these precarious jobs that are going to become the new norm, leading to economic fragility, it’s more uncertainty, more income and wealth insecurity.
SEANA SMITH: Nouriel, just going off of that, I mean, that’s interesting what you’re saying about the labor market because I think that was a lot of questions here going into what we just saw today. I mean, it was a better than expected report. I was going through a number of analysts’ commentary saying that the jobs picture is actually better, and we’re pacing better than what the Fed was even expecting in an unemployment rate level. It sounds like you’re pouring cold water on that, though.
NOURIEL ROUBINI: Well, you know, the economy is improving. We’re creating jobs. But the reality is that you still have, first of all, over 10 million unemployed people. And if you use that U6 definition of unemployment rate that is the one that includes discouraged workers that have left the labor force or those who are working part time but would like to work full time, that number is still 12%. That is huge, by any standard.
So is that an improvement in the economy? Yes. Is it really for those that have precarious jobs a good economy? No. And is that a risk that now, without adequate fiscal stimulus, and even the Fed, even Jay Powell says, let’s err on the side of more stimulus rather than less. Because at worst, the economy recovers stronger sooner. And that’s fine.
But we’re going to have now a situation in which you’re not going to have a fiscal stimulus in a lame duck Congress. And once Trump realizes he’s not going to be president, he has no incentive to give a trillion or $2 trillion stimulus to Biden. Remember, when Obama came to power during a severe recession, there was not a single Republican who voted for that stimulus.
This time around, they are probably going to say, we’re not going to help Biden let the economy rot because we’re going to have a chance in 2022. So we’ll have gridlock like the past, we’re not going to have enough of a fiscal stimulus, the economy is going to weaken, and that’s going to be something that eventually is going to bear negatively on the market.
