Dr Doom: US Economy Going from Bad to Worse

A robust and self-sustaining U.S. recovery is not on the cards, and we should now expect below-trend growth for many years to come, according to Nouriel Roubini, the economist famed for his bearish views.

Roubini, best known for predicting the 2008 economic crisis, outlined five reasons the bulls have been wrong in a post originally published on Project Syndicate, arguing that if America catches a cold, the rest of the world will catch pneumonia:

First, growth is already decelerating. Second-quarter growth slowed from a mediocre 1.8 percent in the first quarter, as job creation — averaging about 70,000 new jobs a month — fell sharply.

Second, the "fiscal cliff." The expectation of automatic tax increases and spending cuts at year-end, plus uncertainty over the presidential election, tax rates, another debt-ceiling standoff, and a possible sovereign downgrade, will keep firms and consumers cautious about spending.

Third, the fiscal drag will bite in 2013. In the extreme case the cliff could mean a 4.5-percent-of-GDP drag on growth. Even a mild version — a mere 0.5 percent of GDP — would be enough to slow the economy to stall speed: barely 1 percent growth.

Fourth, consumption is a mirage. Real wages are actually falling. The only thing sustaining disposable income and spending has been another $1.4 trillion in tax cuts and extended transfer payments — that is, another $1.4 trillion of public debt, stealing growth from the future.

Fifth, the world will not help. Four external forces will impede US growth: a worsening eurozone crisis, an increasingly hard landing for China, a generalized slowdown in emerging markets, and the risk of higher oil prices in 2013 if negotiations fail to convince Iran to abandon its nuclear program.

His conclusion: if the US, still the world's largest economy, starts to sneeze again, the rest of the world — its immunity already weakened by Europe's malaise and emerging economies' slowdown — will catch pneumonia.

(Based on Nouriel Roubini's July 2012 column for Project Syndicate, as reproduced by Economy Watch.)