A Non-Normal Recovery

In my previous post I made the contention that we should not expect a robust recovery and that there was the risk of a "W" shaped double dip. Lets see what the consensus is and whether this is a normal recession as some "green shooters" claim, or something else entirely that no one really wants to acknowledge.



From macroblog, the source of the chart.

The chart plots the four-quarter growth rate of gross domestic product (GDP) from the trough of a recession against the depth of the corresponding contraction, as measured by the cumulative loss of GDP over the course of the downturn. The points within the red circle represent all previous postwar recessions, and they form a nice, neat, easily discernible pattern. That is, the pace of growth in the first year after a recession has, in our history, been reliably related to how bad the recession was. The deeper the recession, the faster the recovery.

The points within the blue circle are based on forecasts of GDP growth from the third quarter of this year through the third quarter of 2010, obtained from the latest issue of Blue Chip Economic Indicators (which reports survey results from "America's leading business economists"). From top left of the circle to bottom right, the points represent the 10 lowest forecasts of the most optimistic members of the 50 Blue Chip forecasting panel, the panel's consensus (or average) forecast, and the 10 highest forecasts of the most pessimistic panel participants.

I chose the third quarter as the reference point because nearly two-thirds of the Blue Chip respondents indicate that, in their view, the recession will indeed end in the third quarter of this year. Assuming this occurs, this recovery would appear to be a big outlier. Either we are about to continue making history—and not in a good way—or current guesses about the medium-term economy are way too pessimistic.

On another note, if you would like to do a little prognosticating of your own, I commend to you our new weekly editions of Economic Highlights and Financial Highlights.

By David Altig, senior vice president and research director at the Atlanta Fed

Well, if the consensus is that the recovery will be absolutely anemic, judging by these low prognostications, then perhaps the "this is a normal recession" meme form the MSM should be dropped because it is incompatible with the consensus forecasts. But we would not want to scare anyone with more truthful reporting, would we? As it turns out, judging by todays consumer confidence index , the US consumer has become cognizant that if one has no job, then there is little reason to rejoice and go on a shopping spree once again in order to jumpstart that 70% of the US economy that depends on consumer spending.