In terms of what type of recovery to expect, I predict a "U" shape, similar to the 1981–82 recession and recovery, in which the initial recovery after the trough is tepid and tentative, followed by a catch-up of economic activity on the previous upward path or at least part of the way. For example, we saw a flattening out of the recession going into the second quarter [of 2009], followed by a 1% GDP growth rate and then 1%–2% growth in the third quarter. The fourth quarter is looking like a 5%–6% annualized growth rate, reflecting what we saw in 1981–82, with companies on target to restock inventory and the contraction in output to lessen.

My advice to CFOs is that if there is a robust recovery, companies with a skilled and trained workforce already in place will do better than those that need to hire in order to ramp up production. Consumers will have little patience with "empty shelves."

History Offers Little Help
Are we in a recovery? If we are then it doesn't look like any recovery we're used to seeing. Typically, postwar recessions are caused by actions of the monetary authorities to stem inflation, but this recession has a very different cause. Resolving it, therefore, is complicated.

Normally at the end of a recession, what the Federal Reserve taketh away it can giveth, spurring a recovery. This has been successful in all the postwar recessions, but this time history is of no help, given the unique reasons for the past recession. The two main tools — fiscal stimulus and lower interest rates — have already been deployed and are no longer available. To the extent they headed off the financial crisis and kept the housing market alive — albeit on life support — they probably prevented a depression.

But, I don't have a terribly large amount of confidence in forecasting a full and fast recovery. We're as likely to be in a strong recovery as we are to experience more serious troubles ahead. There are problems looming that can toss us back into a serious downturn. The government's fiscal stimulus will soon peak and head down, much like "Cash for Clunkers." At best, this recovery, and I hesitate to call it that, is shaped like an "L" with the bottom line undulating like a snake. At worst, it is a "W" — a double-dip recession. I worry that we will repeat the Japanese experience — a long, long period of economic malaise. Despite my outlook, I would advise CFOs to look carefully at their own markets and not let macro-phenomena dictate their decisions. They know their circumstances better than I do.

2010 Does Not Look Good
The recovery in terms of GDP growth began in the third quarter of 2009, and will take the shape of a "square root" or radical sign. That is, an economic cycle marked by a sharp downturn in GDP beginning in December 2007, followed by a significant upturn in output beginning in the third quarter of 2009, and then followed by stagnating output (little real GDP growth) for 2010.

At this point in time, the lack of economic-policy clarity from Washington, along with higher taxes and interest rates for 2010–11, will restrain both consumer and business investment for 2010. There is even the potential, somewhat small but rising, for a "W"-shaped cycle — that is, a dip back into a recession in 2010. Even so, job growth will be muted as it was for the last recession in 2001.

The recovery will be accompanied by an unemployment rate that remains very high by historical standards through 2010. Some people may expect a "V"-shaped recovery given the pop in GDP in the third and fourth quarters of last year, but I see things a bit more muted through 2010. [Despite claims of 5%–6% GDP growth] I see it closer to 2% annualized growth. Manufacturing sectors continue to shed jobs, construction is not really rebounding, and state and local governments will continue to cut spending. Plus, the federal government is just not going to be able to spend in 2010 like it did in 2009.

This is not a typical recovery, in part because of the uncertainties surrounding the government's positions on health-care reform and cap-and-trade (plans to reduce carbon emissions). Consumers also are not spending like you'd expect in a traditional recovery; their confidence was eroded by the unemployment numbers and the housing crisis. While other economists predict inventory restocking by companies after 15 months of reduced inventory levels, we do a monthly survey of supply managers at 900 companies, and only 5% said their current inventory levels were too low. That tells me we're not going to get that "bump" from inventory restocking and higher sales that we thought we'd get. Given the higher short-term and long-term interest rates that are coming, my advice for CFOs is you'd better be borrowing and issuing bonds today rather than tomorrow.

So Many Nagging Problems
There remains significant uncertainty as to where this economy is headed, based on fiscal policies and other variables. The Federal Reserve pushed interest rates to zero, and even that didn't fix things; there are so many problems. We're now seeing actual shrinkage of balance sheets for the first time since the postwar period.

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