Thursday, April 23, 2009
In this report from the Wall Street Journal, David Wessel looks at the prospects for an economic recovery and concludes that the "L" shaped variety is most likely.
There is no doubt where the economy is now. "By any measure, this downturn represents by far the deepest global recession since the Great Depression," the International Monetary Fund declared Wednesday.There's a good deal of detail provided on the possible paths and, in the process, some cold water gets splashed on the whole idea of a strong rebound commensurate with the rate of decline experienced over the last six or eight months.
The alphabet can help to imagine the possibilities and the path of the economy. There's the letter V: the kind of quick rebound that usually follows a deep recession. Or U: a longer recession and slow recovery. There is L: years of painfully slow growth. And W: a temporary upturn as the economy feels the jolt of fiscal stimulus that quickly wears off. Finally, there's the big D, not the shape but another Great Depression.
Then again, if a "V" shaped recovery does emerge, it will likely be front-loaded with inflation.
Interestingly, the odds of another depression exceed those for a "V" shaped return to normalcy that so many pundits have been clamoring for after all the "green shoots" began to appear last month.
Here's a summary of our chances:
The odds of the V: 15%That sounds about right, unfortunately.
The odds of the big D: 20%.
An unfolding depression could scare Congress to act boldly, but the L is less ominous -- and perhaps more likely as a result. There would be months when the economy appeared to be strengthening so the temptation to wait-and-see would be strong.
Put the odds of the L at 55%. That adds to 90%. So put 10% odds on the U, less pleasant than the euphoric V but far less painful than a Lost Decade. That's the rough consensus of economic forecasters; it means U.S. unemployment grows for another year and a half.
Here's Mr. Wessel himself for more on the subject.