Good News Update: Nouriel Roubini Versus Warren Buffett

Nouriel Roubini (aka Dr. Doom) continues to have a gloomy outlook on the U.S. economy. Warren Buffett's purchase of Burlington Northern Santa Fe Corp. shows his faith in the economy's long-term health. Which one is right? I would say Buffett, especially given some of the good news occurring in our economy. Consider the following:

Productivity rose at an annual rate of 9.5 percent during the third quarter. That's good news not only for corporate profits but also for inflation, as increases in productivity reduce the risks of inflation. The dramatic increase in productivity caused unit labor costs to fall at a 5.2 percent annual rate in the quarter, leading to the biggest 12-month decline since records began in 1948.
In October, manufacturers reported that output around the world was rising at the fastest rate in five years. The JPMorgan global composite purchasing managers' index rose to 54.4, up from 53 in September, the highest figure since July 2004. In the U.S., the Institute for Supply Management's factory index rose to 55.7 from 52.6 in September, which was well above market expectations. In addition, the employment component of the ISM figures jumped from 46.2 in September to 53.1 in October, the highest reading since early 2006. Both this data and the increase in productivity suggest that factory sector payroll employment may have stabilized.
The number of contracts to buy previously owned homes in the U.S. rose in September for an eighth straight month. The index of signed purchase agreements rose 6.1 percent after a 6.4 percent gain in August. Compared with a year earlier, pending sales rose 19.8 percent. In addition, the number of previously owned homes on the market dropped 7.5 percent to 3.63 million in September. At the current sales pace, it would take 7.8 months to sell those houses, the lowest level since March 2007. Importantly, the figure is finally approaching a level that's usually consistent with stabilization in prices.

Despite the good news happening in the economy (and the favorable reaction we're seeing from the markets), Roubini has continuously had an unpleasant forecast for the economy. On the other hand, Buffett made it a point to demonstrate his faith in the economy when he announced his purchase of the railroad, saying "If you buy a railroad, you can't move it to China or to India or anyplace else. You are betting on the United States. I can't think of a surer bet."

For all those who believe "the sky is falling," I suggest you ask yourself whether it seems more logical to take your advice from Roubini (or any other economist or market forecaster for that matter) or the man with perhaps the greatest long-term track record of success?

Larry Swedroe

Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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