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by Michael Zielenziger, AARP Bulletin, February 4, 2009
V’s, U’s, W’s, L’s—economists often look to the alphabet to help describe their forecasts. So as the Obama administration seeks a massive stimulus of more than $800 billion from Congress to get the American economy back on its feet, we’ve asked some noted macroeconomists which letter they favor as they think about the year ahead.
Will the resurgence be as rapid and robust as the downturn—and trace a V? Might it stretch out and take far longer before America sees real job growth and an economic rebound, and look more like a U? Might we be in the midst of a “double-dip” recession, where initial signs of a recovery are aborted and recession takes hold again, something like a W?
Or could the current slide resemble the scarlet letter of the economist’s alphabet—the dreaded L—because we’re headed for long-term stagnation from which there is no obvious or immediate exit?
A vote for V
Joseph Carson, an economist with the investment advisory firm Alliance Bernstein, remains optimistic. He favors the V. If the unprecedented collapse of the third and fourth quarters of 2008 were an infamous “black swan”—the sort of highly improbable event that almost never takes place—why can’t 2009 be a year of the “white swan,” he asks.
“There are two sides of the bell curve,” Carson says. “One is black and one is white. People are underestimating the huge monetary and fiscal stimulus now under way,” he says, noting the $350 billion Treasury Department plan to shape up the balance sheet of troubled banks, in addition to the fiscal stimulus plan now before Congress. “The collapse in oil prices lessens global imbalances. And declines in inventory and production at home have been so drastic that even a slight uptick could lead to a giant rebound. So that gives us the real possibility of a V shape,” he says. So eager were companies to pare down employees and inventories, he adds, “they may well be left with too little, rather than too much” capacity.
It’s W or U
Less sanguine is Diane Swonk, chief economist for Mesirow Financial in Chicago. She thinks the recovery might stretch out and take far longer before America sees real job growth and an economic rebound. Echoing President Obama, she says, “We are in a deep recession and conditions are going to continue to get worse before they get better.” The letter she’d adopt depends on when you date the beginning of the downturn. If you track the recession from when it officially started—December 2007, according to the National Bureau of Economic Research—then the recovery “looks like a W. If we start it later, I think a U is more likely.”
“Some stabilizing of financial markets and an abating of losses in housing could allow for subpar growth in the second half of 2009,” Swonk says. “The effects of monetary and fiscal stimulus will not really kick in, however, until 2010 and 2011,” in part because the positive effects associated with infrastructure investment have a particularly long lag time. “Even shovel-ready projects will take at least 120 days to get up and running,” she says.
The L word
Maybe because he’s based in California, where the housing and retail downturns have been particularly swift and painful, Edward Leamer votes for the dreaded L as his letter for 2009’s economy.
“The V is the normal shape of these downturns,” says Leamer, director of the UCLA Anderson Forecast (which predicts the U.S. and California economies) and a professor at the university’s business school. “The first stroke of the V is supposed to be about homes and cars … and then the second stroke is also about homes and cars. I simply can’t imagine houses being a locomotive pulling us out of this recession.”
Both houses and cars are very troubled, he says. The country has never before experienced such price declines, and they show no sign of abating. Add to this the depressed sentiment of consumers, who remain far too worried about growing debts and sliding home values to boost their spending. “We see it as an L,” Leamer says, “a lingering, disappointing economy which will drag on until consumers improve their balance sheets.”
Michael Zielenziger is based in Oakland, Calif., and writes on business and the economy.
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