The Shape of Things to Come

Much of the recent talk about an economic recovery concerns what shape it will take — literally. Will the plunge and rebound conform to the "V" shape that described the 1973–74 recession, be akin to the "U"-shaped recovery seen after the 1981–82 recession, or sputter into the dreaded "W" — twin recessions (the much-discussed "double dip") that keep the economy on the ropes for years?

We asked eight leading economists to get graphical with us and describe what shape they believe will ultimately win out. We present them here in descending order of optimism, if for no other reason than because to do the reverse would guarantee that you don't finish reading the article. And we give the last word to one economist who offers a refreshing dose of humility regarding his profession's ability to predict what lies ahead.

Employment Improves by Midyear
We're in a recovery that started in the third quarter of 2009, with real output growing. I anticipate we will see additional job growth by the end of this quarter, with unemployment falling by the third or fourth quarter in a meaningful way, given that we are producing more goods and services. Still, it will take time for people to believe this.

Consequently, I don't see a "V"-shaped recovery — a big, dramatic jump like we've seen in the past, such as the 1974–75 recession where output returned to its prior path quickly. This is more of a "U"-shaped recovery like the 1981–82 recession. I would like to say it will be a "V," but my profession tends to look for the clouds instead of the sun coming through, which is why we are called the "dismal science." The natural inclination is to err conservatively — not promise a big recovery and then end up with egg on your face.

We still need to work through problems like the housing market, unemployment, and consumer uncertainty. And there are some clouds on the horizon like continuing government spending and the specter of taxation to reduce the federal deficit. But I'm relatively optimistic. It was such a significant economic downturn, shaking our foundations and making banks and consumers apprehensive. As banks open their taps, we'll see new businesses formed that will employ more people, guiding decent employment levels by the middle of the year.

For well-funded companies that weathered the economic storm, the time is ripe for acquisitions. Good companies with a long history of running successful businesses that have solid relations with equity and debt investors should seize this opportunity.

There Is Less to Fear
GDP went positive in the third quarter of 2009, improved in the fourth, and there are expectations of 3% growth or more for the first quarter of this year. To me, this suggests the shape not of a "V" but of a check mark — down really quickly and then back up fairly slowly.

The unknown in all of this is the consumer, and whether or not the federal stimulus money that is driving things for the moment will attenuate over the next several months. My assessment is that consumer spending will come back this year and the labor market will turn. When output increases as employment decreases, it means employees and processes are strained, and that is unsustainable. Even with a 3% "middle of the road" growth rate, employers will have to start rehiring. We're already seeing some of this — the November jobs report was very good, though December was somewhat less good. But that's still better than losing 700,000 jobs in a single month, which is what we saw during the recession.

As jobs are created or disappear at a lower rate, people will be less fearful, fueling their spending habits. Housing is equally crucial to consumer psychology, and we're beginning to see it stabilize at the national level, though not regionally in the formerly boom markets like Phoenix and Miami. Overall, I am cautiously optimistic. This is not the time to bar the doors and hide under the bed. Hunker down and you can miss the recovery. It's happening, and it's not a bubble. This is real growth tied to fundamental factors.

Get Ready to Ramp Up
We are definitely out of the recession, so, yes, we are in a recovery. The recession began in December 2007 — the date that the National Bureau of Economic Research contends marked the peak of the previous economic period. The data will probably show that the trough came in June 2009. I say this despite the employment figures, which are a lagging indicator of overall economic activity, sometimes by just a few months, or, as with the 1991 recession, closer to a year. Clearly, we lack a strong labor market, with 80,000 jobs lost in December, though nothing on the magnitude of the 500,000 jobs lost monthly during the height of the recession.

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