Tuesday, July 21, 2009

Shape of the recovery: pathetic

On the recovery:
  • Roubini on CNBC (with video, found on Calculated Risk):"The recovery is going to be subpar," Roubini said. "I see a one percent growth in the economy in the next few years. There will also be 11 percent unemployment next year and the recovery is going to be slow. It's going to feel like a recession even when it ends."
  • Dennis Lockhart (from Bloomberg): “The economy is stabilizing and recovery will begin in the second half,” Lockhart said in the text of remarks in Nashville, Tennessee. “The recovery will be weak compared with historic recoveries from recession. The recovery will be weak because the economy must make structural adjustments before the healthiest possible rate of growth can be achieved."
  • From the Federal Reserve Bank of San Francisco (via Economist's View): "In our view, the recovery will be painfully gradual, with the economy expanding below potential for several quarters."
I could go on (but don't have time this morning). The point is: the consensus view is for a more gradual recovery compared to previous recessions. So what is "gradual"?

By the way, I am also looking for statements by economists that are calling for a V-shaped recovery - please pass along links to those articles.

The chart illustrates GDP in levels (indexed to the end of the recession at 100) during the recession and recovery (the 2 years following the recession, except for 1980, which is 1.5) for all post-war recession that dropped GDP 2% or more, the Biggies. Note: the recession dates are set by the NBER.
  • The '73-'75 recovery is often classified as U-shaped.
  • The '81-'82 recovery is the typical V-shaped.
  • 1980 was headed toward the V, but then the economy "dipped" back into recession - the so-called W-shaped.
  • Notice that the recovery for 07-09 (provided the recession ends in Q2 09) is nothing short of pathetic. The 07-09 A recovery uses Wells Fargo's publicly posted forecast, and is likely the L-shaped if growth rates do not surge in 2011. Even when I simulate the recovery for 3.5% annualized growth starting in Q3 2009 (07-09 B) which is above potential growth, the recovery remains very weak.
This is what they mean when they say it's going to feel like recession, even when the economy is expanding again. The early stages of the recovery are unlikely to produce growth rates that are strong enough to bring down the unemployment rate until well into 2010. Oh man.

Rebecca Wilder


  1. My favorite term is "recoveryless recovery."

  2. This whole "recovery" is so lame that a new word needs to be applied - like "recoveryless recovery" - great, Irrational Doomsday!

  3. Rebecca, can we really talk about a V-shaped recovery for a recession already 18-months long?
    I thought V-shaped applied to brief recessions like 2001....
    Best we can have now is U-shaped.

  4. There will be no recovery!

    The term "Recovery" assumes that one can return to where one used to be, i.e. the FIRE-economy, the heady days of using borrowed money to bid up "assets" which can then be used as collateral for more leverage (which could ultimately be sold off as AAA bonds to suckers making the whole process entirely risk-free).

    That economy is long dead; all that remains is to switch off the machines keeping its organs alive.

    PS: I don't know what the new one will look like either.

  5. Technically, recovery is the period from the bottom until real gdp surpasses the prior peak.

    One of my favorite forecasting rules is that recoveries last as long as the recession -- the time from the peak to the trough. In other words, mild recessions have weak recoveries and deep recessions have strong recoveries.

    This even worked in the 1930s as the 1933-1937 recovery was a mirror image of the 1929-33 fall.

    I've been in this business since the early 1970s, and the consensus at economic bottom has always
    been for a weak recovery. At the bottom economist always have a long list of reasons why the recovery will be weak.

    Maybe this time will be different and we may actually have a weak recovery, but just remember that economist have a long and repeated history of underestimating the strength of recoveries.


  6. Hi Spencer,

    I always appreciate your comments. But if I remember correctly, you are forecasting an L-shaped Japan-style path for the US. Is this correct?


    Hello PaulE,

    Yes, we most certainly can talk about a V-shape recovery – in fact, the 81-82 recession (which was 16 months long) was a V. The Fed started lowering rates, and the economy was off. The U seems to be the consensus, but V is NOT out of the question. The milder the recession (i.e., 2001), the milder is the recovery…

    You can get a V with a big inventory surge (or in this case, a sharp drop in the rate of draw), a pickup in housing and construction (not fully offset by commercial real estate), or a surge in consumption. All of these things seem unlikely too soon given the state of the financial system and Fed policy already on full blast. But nobody really knows, which is why I am looking for links to the alternate view.

    Thanks for commenting. Rebecca

    Hi Fajensen,

    There are certainly a lot of risks, fiscal deficits, inflation, growing mortgage problems, credit, etc. But I think that it is a bit of an exaggeration to say that the economy is dead.


    And Irrational – you are always on top of the new terminology. I think that my favorite quote of yours (and I am paraphrasing) was when you called Roubini being on the Panel of Economic Advisers a “green shoot”.


    Hi Aunt Jane!

  7. Japans lost decade, like the US long depression was not "L" shaped. Rather, they were a lot of little up and down cycles around a flat trend.

    But you are right, for a long time I have been talking about a Japanese deflationary environment and to be technical it does conflict with my comments above.

    But that does not always preclude my making contrary observations, especially since the Japanese or US long depression did not include a single recession as deep as this one. We could have a sharp snap back to the prior peak and that would not violate a weak long term trend.

    When I see everyone saying the same thing it is my nature to question that, even if I do not disagree.



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