These are three prevailing thoughts about the US recession--and how quickly we will see recovery.
My favorite economist, Brian Wesbury, believes we will experience a "V" shaped recession. He is a member of the Academic Advisory Council of the Federal Reserve Bank of Chicago, and also an adjunct professor of economics at Wheaton College in Illinois.
Rather than being the first of several negative quarters of economic growth, Wesbury optimistic outlook is that this will be a temporary capitulation due to the credit crunch, with almost all of the economic losses postponing economic activity into what will turn out to be a healthy period of growth in the second half of 2009.
His rationale: This sharp drop in growth is due to a true credit crunch with some panic thrown in for good measure. It is not a typical recession caused by fundamental, economy-changing events such as higher tax rates, tighter money, protectionism, or other public policies that stifle innovation or entrepreneurship.
Contrary to Wesbury's rather optimistic view of this recession, the mainline economic thought is for an "L" shaped recession. Conventional wisdom believes that the current recession will be longer and deeper than any recession the US has experienced since the early 1980s, continuing through 2009 and probably into 2010.
Those who hold this view will eagerly look to a stimulus package from the Obama administration to help pull the US from this quagmire. It takes a long time for a multi-billion spending package to be implemented and have an effect.
These expenditures then dovetail with the idea of a long-term recession. If we use the National Bureau of Economic Research assumption that the recession started in December, 2007, then according to the "L" theory, the US could be in a recession for at least three years.
A "U" shaped recession is akin to the predication of Harry Dent, Jr. His pessimistic view is based on the demographic forces of retiring Baby Boomers.
Baby Boomer consumption has heretofore driven the US economy. Now Dent sees deflating real estate & stock prices as demand falls--and Baby Boomers seek to live off their investments.
He expects a brief economic recovery in the this year or next as a result of interventions led by Fed Chairman Bernanke & Treasury Secretary Paulson, but then with rising interest rates, high inflation and in his estimate, oil at as much as $225 per barrel, the US will drop back into a long recessionary period.
Where is the US Gross Domestic Product (GDP) right now? Here is the relative growth (or decline) in GDP for all the goods & services produced.
After a nice, long period of economic growth this decade, you now see an abrupt decline, particularly in the 4th quarter, 2008.
The -3.5% (annualized) change in the 4th quarter, 2008 is considerably less than the consensus estimate of -5.5%. But don't break out the bubbly just yet.
The drop in GDP was less than expected because of higher inventories. That leaves two alternatives:
- Either the inventory increase will be revised away in future revisions to this initial GDP estimate (reducing Q4 real GDP growth), or
- The inventory correction in the first half of 2009 will be extremely sharp, meaning real GDP in Q1 may be even weaker than in Q4.
Hence, the big question: Will this be an L U or V shaped downturn?
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