Experts Weigh In on the Shape and Size of This Recession

Back in December, with the U.S. recession in its 12th month – and showing no signs of abating – Money Morning Contributing Editor Martin Hutchinson warned that an “L”-shaped recession was very possible.

The U.S. recession is now in its 15th month, and many economists now expect the downturn to last until 2010 – if not longer. In fact, some economists now say the U.S. malaise could easily evolve into the virulent “L-shaped” downturn that Hutchinson predicted – a development that would guarantee both the maximum pain and the slowest recovery, experts say.

“I said in December that the recession could be ‘bloody-L shaped.’ With the huge deficits, that now looks the most likely outcome – and believe me when I say that it will be very bloody,” Hutchinson said this week. “The economy will bottom quite soon, but every time it tries to emerge, the drags of the federal deficit, the huge bank bailouts and the huge money creation will drag it back.”

Noted Hutchinson: “It won’t get all that much deeper – it’s not 1929-33 – but my estimated emergence date is about 2013. The economy will remain essentially flat till then, although wobbles may make [it look like a “W-shaped” recovery] –until you realize there are more than two bends in the ‘W’.”

Nouriel Roubini, the professor with York University’s Stern School of Business who predicted the current financial and economic crises, wrote in the March 1 edition of The New York Times that the recession could last a total of 36 months. The U.S. slump – instead of following a typical “U” shaped rebound – “may turn into a more virulent L-shaped near depression,” he wrote.

Reports Keep Getting Worse

U.S. gross domestic product (GDP) contracted at a 6.2% annual pace in the fourth quarter of 2008, the U.S. Commerce Department reported Feb. 27. That’s the biggest drop since 1982, and was far more than analysts had anticipated, Money Morning reported.

The government had earlier estimated the drop in fourth-quarter GDP at 3.8%. The subsequent revision of 2.4 percentage points was almost five times as large as the average adjustment. Global trade, which contributed a 0.1% gain in the advance report, actually subtracted half a percentage point from growth last quarter, indicative of the truly worldwide nature of the current financial crisis.

“Most of the major components contributed to the much larger decrease in real GDP in the fourth quarter than in the third,” the Commerce Department said. “The largest contributors were a downturn in exports and a much larger decrease in equipment and software.”

The U.S. economy lost 651,000 jobs in February, the fourth month in a row where job losses were right around the 600,000 mark. The unemployment rate rocketed to 8.1%, its highest level in more than 25 years. The U.S. economy has now shed 4.4 million jobs since the recession began in December 2007, with more than half coming in the last four months.

Thanks to a seemingly unending stream of bad news or disappointing economic reports, the Standard & Poor’s 500 Index has sold off sharply and trades at or near 12-year lows.

"This is what falling off a cliff looks like," Lawrence Mishel, president of the Economic Policy Institute, told MarketWatch.com. [For a complete analysis of the February employment report, check out this story, which appears elsewhere in today’s issue of Money Morning].

Optimism in Short Supply

Because the U.S. economic landscape is so dour right now, economists say there could easily be another two to four years of malaise.

“I find it quite easy to imagine two consecutive years of contraction,” Harvard University financial historian Niall Ferguson, a financial historian at Harvard University, said in one of 11 assessments by economists that appeared in The Times. “I don’t rule out two more lean years after that,” he said. Bloomberg News summarized the assessments in an article last week.

Although the burst of the housing bubble, the U.S. financial system morass, global trade problems and soaring joblessness are all key contributors, the drop-off in consumer spending is the key culprit, since it accounts for 70% of the country’s economic activity.

Because U.S. consumers are in such bad shape financially – and are obviously both angry and scared – any “whiffs of growth [this year] are likely to herald a false dawn,” Morgan Stanley Asia Chairman Stephen Roach told The Times, noting that he doesn’t expect to see the economy begin to actually expand again until late 2010 or early 2011.

And when the recovery does begin, it will likely be weak – if not downright anemic.

For one thing, history shows that – after a severe banking crisis – an economic system typically takes as long as four years to return to its prior personal income peak, says University of Maryland Economist Carmen Reinhart.

George Cooper, author of “The Origin of Financial Crises: Central Banks, Credit Bubbles and the Efficient Market Fallacy,” said that while the recession – as technically defined – could be over by the end of 2010, “the broader credit cycle will likely remain a significant drag on economic activity well into the next decade.”

Some Bright Spots?

There are some optimists – including former U.S. Federal Reserve insiders Alan Blinder and William Poole. Both Blinder, the former central bank vice chairman, and Poole, the former president of the St. Louis Fed, are both on record predicting an upturn in the economy late this year.

Blinder, a Princeton University economics professor, said that “housing must hit bottom at some point,” Bloomberg reported. When that happens, house-hunters could come out in droves, said Eric E. Schmidt, the chairman and chief executive officer of search giant Google Inc. (GOOG).

“Americans love a bargain,” so the economy will get a boost from consumers jumping in to take advantage of once-in-a-lifetime buying opportunities, Schmidt said.

James Grant, editor of Grant’s Interest Rate Observer, agrees that falling housing prices will jump-start growth. But he’s just not willing to predict when that will happen.

“Today’s low prices, painful though they may be, are the market’s own shovel-ready stimulus,” Grant wrote in his Times Op-Ed piece. “Before you know it, the stock market, and the residential real-estate market, too, will be on their way back up again — just don’t ask when.”

Original post

Comments

[peterthepai...:]

L...

read...An L of a recession – reform is the way out

www.ft.com/cms/s/0/27c...

Mar 09 08:40 AM

[samwise:]

So in other words this "recession" started many months before all the economists said it was even going on and when they were claiming our economy was growing just as the recovery will have begun long after these same economists are claiming we're still in a depression? And the economic value of these forecasters is again???? Clearly they need to move beyond their mere soothsaying. Perhaps they could learn a trade--like fixing Ford F-150's or something.

Mar 09 08:45 AM

[Jim Hawthorne:]

These are experts???
“housing must hit bottom at some point,”
"... not willing to predict when that will happen."
“Before you know it, the stock market, and the residential real-estate market, too, will be on their way back up again — just don’t ask when.”

Pessimists on the one hand and optimists on the other; if you interview any 6 people waiting at a bus stop you'll learn about as much!

The blind continue to lead the blind! We'd all be better off just listening to what the market is telling us and ignoring the incessant babbling of the 'experts'!

Mar 09 08:56 AM

[yellowhoard:]

We'll all be swimming in chocolate rivers with lolipop smiles on our faces in no time.

Mar 09 09:06 AM

[prudentinve...:]

Martin Hutchinson has correctly predicted several details of the current crisis. I agree with his current prognosis, which appears realistic, logical and sensible.

As for the geniuses from the fed, talk of the economy turning on a dime and shooting up on a sea of printed money is consistent with their past policies. However, I am afraid they have given the economy too many rounds of drinks, and the hangover is now for real, and for a while.

Mar 09 09:18 AM

[sorgmot:]

The Fed and the US banks have wrecked the US economy 2 times since it was begun in 1911. Once in 1930 to 1950 and now in 2000 to 2020 or beyond.

Living standards for the great majority of US citizens are spiraling downward.

US citizens are drowning in a sea of debt with big expensive governments sitting on their shoulders to make sure they do.

There is no fix acceptable to US governments. They will drown also after the US citizens do.

Other national governments around the world have the same financial designs as the US. Their financial disarray is now like the US's. Their collapse will follow the US pattern.

Academics in Moscow now forecast US collapse into 6 regional governments and the attachment of Alaska to China and Russia.

Good luck.

Mar 09 10:14 AM

[aware:]

All the know it alls, realy know nothing.

Mar 09 10:42 AM

[Jason Rines...:]

Here is a one of my comments from the article The Stock Market Is Not the U.S. Economy November 14th:

Comment: 'There is no glory in being right all along about the disconnect and encapsulation effect of Washington and Wall St and unfortunately collusion. Actually, there have been four depressions in America's history caused by such collusions in banking and government.

I commented here often beginning in 2007 the crap was going to hit the fan and when. The next bull will be 2013 with a lot of pain and economic restructuing in-between. The last two months of performance are the formation of a depression, stimulus always occurs in an election year and for obvious reasons was heavy this year.

10% of excess capacity in all sectors beginning in 2002 to current has come off the U.S. economy. Another 10% is coming off between now and 2011. I expect a decent bear rally in 2009 after Q1. For those with substantial cash, this is the opportunity of a lifetime. That represents about 3% of the population. To all others, this will be the most miserable few short years Americans have experienced in our lifetime. But leadership and innovators will step up, let's see if Washington accelerates this process or continues hindering it as a continuation of an oligarchy.'

Now look at comment after the elections:

) 'This is a "W" shape recession/depression event. The first leg down will be over by the end of Q1 2009.
2) Fiscal stimulus will help on job creation, but this will be kicking in on the second leg down. We'll see some positive momentum from Obama taking office January 20th, probably similar to the 100 days of up market when Herbert Hoover 1st took office in 1933.
3) Investors do have a lot of cash sitting on the sidelines. $4.3 T. However, until Great Depression regulation has been restored that facilitated this new depressionary event, that money will stay on the sidelines. Too many of the old guard management that did not do it's job at corporations and regulatory bodies are still present and as such will will have to be replaced. That takes time.
4) I stick by my 2007&2008 general statement that America is moving away from Efficient Market back to Save and Invest. As Americans live with a continued flat wage but declining prices, they have just begun paying down personal debt. This last year has been very painful for the consumer and investor alike. It was a painful demonstration of Chronie Capatalism. Neither group will simply just "forget". The words 'value proposition' will mean something now in the future if you intend to have a profitable company.'

All my comments from the end of Q3 2008 mirror Hutchisons forecast this will be a W event. I didn't post all of those comments since 2007 out of vanity. I warned all I could here, at every blogsite, my friends and family. I am now building a technology platform to connect the masses in the blogosphere's, educate the masses on basics and create actionable plans. Emerging leadership will begin stepping into office in 2010 and 2012. This happens out of pain. The citizens begin conducting research into the politicians in the House of Representatives when depressions begin. Voter revolution occurs after 4 years after the crisis begins. Voter revolution is when the reelection ratios drop between 70%-80%. They have been over 90% for over 50 years now. Our job as investors is to give the public the facts. The best way to do this is online as a counter to main-stream-media (MSM) which misinformed investors and fooled the citizens into believing this was all one man's fault, Bush. While I am no fan of Bush, the real power of the economy sits with Congress whom are either inept or corrupt.

Mar 09 11:16 AM

[Firat Ünlü:]

All these so-called experts are ********** useless ******* that would have stepped down from office had they any self-respect. If physicists were as poor as economists we'd still be in the stone-age! (Yes, I am on a personal crusade against mainstream economists...)
Please, I urge everyone not to follow these forecasts, you WILL lose your money otherwise.

Mar 09 04:17 PM

[Steve in Gr...:]

The "experts" that are optimistic about a recovery in 2009 are Alan Blinder (Princeton economist) and Eric Schmidt (Google chairman) are both big leftists. Blinder was in the Clinton administration and in the Kerry campaign. Schmidt contributed significantly to Obama's campaign.

I think one of the most negative things about the current stock market is that there are still large pockets of investor confidence in Obama. These guys are still long, bless their hearts.

Mar 09 04:58 PM

[Glen L.:]

What mystifies me is what the so-called experts think is going to lead the US out of this depression. Obviously it won't be financials -- they are toast for many years to come. Manufacturing? Ha! Even if the US is still a heavy lifter in that sector, as some claim, how much of that is "defense" and empire related, and what happens when the empire falls? Will we have any auto industry at all, even a year from now? Maybe the medical sector -- oh, no, the Democrats are socializing medicine which will lead to rationing and the end of medical entrepreneurship. Well, there's still computer software and Hollywood movies... except software development is going open source, and the technology to make movies is so cheap now that the days of Hollywood dominance are surely numbered.

Lessee... petrochemicals (nah, peak oil is past). Green technology (long on hype, short on results). Nanotech (worse even than green tech). Tourism (ah yes, millions flocking to our shores to watch us rot).

Wait, I have it - farming! The whole world is going to be hungry very soon, and we still have millions of acres of arable land here. Wouldn't it be fine if it turns out that Jefferson was right all along in his vision of a sophisticated, peaceful, agrarian society, and with his deep distrust of bankers and central planners of all stripes.

I think I'll go out and buy some heritage seeds and a couple of breeding hens...

Mar 09 05:24 PM

[yellowhoard:]

Amish country! They're quiet and they won't shoot at you.


On Mar 09 05:24 PM Glen L. wrote:

> What mystifies me is what the so-called experts think is going to
> lead the US out of this depression. Obviously it won't be financials
> -- they are toast for many years to come. Manufacturing? Ha! Even
> if the US is still a heavy lifter in that sector, as some claim,
> how much of that is "defense" and empire related, and what happens
> when the empire falls? Will we have any auto industry at all, even
> a year from now? Maybe the medical sector -- oh, no, the Democrats
> are socializing medicine which will lead to rationing and the end
> of medical entrepreneurship. Well, there's still computer software
> and Hollywood movies... except software development is going open
> source, and the technology to make movies is so cheap now that the
> days of Hollywood dominance are surely numbered.
>
> Lessee... petrochemicals (nah, peak oil is past). Green technology
> (long on hype, short on results). Nanotech (worse even than green
> tech). Tourism (ah yes, millions flocking to our shores to watch
> us rot).
>
> Wait, I have it - farming! The whole world is going to be hungry
> very soon, and we still have millions of acres of arable land here.
> Wouldn't it be fine if it turns out that Jefferson was right all
> along in his vision of a sophisticated, peaceful, agrarian society,
> and with his deep distrust of bankers and central planners of all
> stripes.
>
> I think I'll go out and buy some heritage seeds and a couple of breeding
> hens...

Mar 09 06:12 PM

[Firat Ünlü:]

Very good post, the question you raise hasn't been answered by the 'next-quarter-brigade' whose entire model is plain ignorant. What's clear though is that whatever comes has to a) finance the deficits and shortfalls and b) provide sufficient jobs within America to make a substantial impact. Many people will need health-care but how many will be able to afford it? People will need to look after ageing retirees but pension funds are down so who's to pick up that bill?
Same applies to education and other areas.
Farming could be an option as China faces water shortages and (will) struggles with arable land so there's one huge market.


On Mar 09 05:24 PM Glen L. wrote:

> What mystifies me is what the so-called experts think is going to
> lead the US out of this depression.

Mar 09 06:22 PM