What Letter (U,V, or W) Will This Recovery Form?

MorganLeFay

What Letter (U,V, or W) Will This Recovery Form?
Posted by Gary Alexander on 9/1/09 10:01 pm

We hear a lot of debate about the shape of the economic recovery these days. In short-hand terms, the three most common designations come late in the alphabet, and in consecutive order:

• A “U”-shaped recovery has a long and low trough before recovering, gradually at first, then more sharply.
• A “V”-shaped recovery is a sharp decline, followed by a sharp recovery.
• A “W”-shaped pattern implies a double-dip recession, with the look of a “V” or a “U” at first, but then cut off in mid-recovery by another sharp drop, then a final recovery.

Of course, there are some other mischievous letters screaming for attention earlier in the alphabet:

• The worst possible scenario is an “L”-shaped future, in which there is no recovery apparent on the horizon “for as far as the eye can see.” We’re clearly not there.
• An “E” recovery implies a split economy – with some sectors not declining at all, while other sectors sink to an “L” formation, split by a narrow mezzanine in-between.
• A “WWW” recovery is a series of double-dip recessions recurring for several years.

Bear in mind that these letter designations refer to the economy (the Gross Domestic Product, or GDP).They do not refer to the stock market, which has already shot back in a “V” rocket arc. Since the stock market historically precedes any economic recovery by 4-6 months, we are now seeing the start of a similar “V” shaped economic recovery, based on these recent GDP figures:

Click on chart to expand or print

You could argue that this is more of a “U” recovery, since the recession is already historically longer (21 months) than any post-war recession, and the bottom last fall and winter was so deep (down nearly 6% over a six-month stretch) but when charted out, it looks more like a “V” to me.

All indications are that the recession ended last quarter. As we enter September, we have already seen a four-month string of increases in the Leading Economic Indicators, plus a drop in new unemployment claims, a sharp rise in the ISM manufacturing survey, and a turn up in most housing indicators. This week (Tuesday, September 1), we learned that U.S. manufacturing expanded for the first time in 18 months in August, rising from 48.9 in July to 52.9 in August – the highest level since June 2007. (Any number above 50 indicates manufacturing expansion.)

Historically, these are the leading bellwethers of an economic recovery, and they all point UP.

Will We Have a “Double-Dip” (W) Recession/Recovery?

The next question – impossible to answer with any authority yet – is whether or not this initial V-shaped recovery is just half of a “W” (recession-recovery-recession-recovery). Actually, there has been only one such double-dipper in modern history and that was in 1979-80 and 1981-82, when we had two back-to-back recessions, due mostly to schizophrenic Federal Reserve policies under two Fed regimes (first, an inflationary G. William Miller, and then a deflationary Paul Volcker).

Of course, recessions can be shallow or deep, short or long. Normally, a recession comes from an inflationary blow-off of over-expansion, accompanied by high interest rates, but this has not been a normal recession: We have not seen high inflation, high interest rates, or tight money; so the Fed couldn’t cure this recession by lowering interest rates, which were already too low to cut further.

So far, this is a business-led recovery, based on rising profits from cost-cutting; but the consumer has been noticeably absent from the party. The “Personal Consumption Expenditure” component of GDP, which represents 70% of total GDP, is down 1.8% year-over-year (second-quarter 2009 vs. second-quarter 2008). That’s the bad news. The good news is that we are about to enter some quarters in which the year-over-year figures will turn positive, providing a big boost to investors.

We already have some indication that the consumer will soon join the party. Last Tuesday, the Conference Board’s survey of 5,000 households reported that its consumer confidence index rose to 54.1 in August, up from a revised 47.4 in July – and far better than economists’ consensus expectation of 48. Also notable is that the Conference Board’s expectation index rose from 63.4 in July to 73.5 in August, the highest reading since December 2007, when the recession began.

This rise in consumer confidence is the necessary first step to a turnaround in consumption, but we have to see the proof this fall, before we can rule out a double-dip recession. Lately, Louis Navellier has been stressing that we won’t confirm the chances of a double-dip “W” until about next May, after seeing nine months of very favorable year-over-year comparisons in economic indicators and earnings. If nine months of positive news and rising markets don’t get the U.S. consumer out of his “funk,” then we may indeed be heading for a second recession by 2011.

However, the smart money – as always – is on the U.S. consumer delivering a “V,” not a “W.”

trueself

thanks!

纽约的鱼

已经没有可能U了，估计是W, V要创历史了。

ppteam

1# MorganLeFay

天天都在猜U V, W， SERIOUSLY, who knows.
还没准是个I

CoolMax

你漏了“L”啦！

maimait

how about O axisymmetric and beautiful