by Ronald Louis Peterson

Created on: August 29, 2009   Last Updated: September 08, 2009

Decoding The Recovery

The U.S. recession has unofficially ended according to Federal Reserve Chairman Ben Bernanke. The U.S. and global economies "appear to be leveling out," he said. "Prospects for a return to growth in the near term appear good," and the recovery is "likely to be relatively slow at first," with unemployment declining only gradually. [1] A

Congressional Budget Office report went further, forecasting that the unemployment rate will average 10.2 percent in 2010. [2]

So, shouldn't we be happy that the recession has turned the corner? Not really because nobody can say how, when or even if life will return to pre-recession conditions. But, hope is not lost. A radio station in Loves Park, IL has all the answers. The station's call letters, WLUV, are really a code which when deciphered by economists, reveals the answers to these intriguing questions. Each letter in its name represents a different route the recovery could take.

The Shape of Things to Come

For some experts, the "W" represents a recovery that rises, as it is doing now, then falls again before finally sustaining growth. Steve Hanke, professor of Applied Economics at Johns Hopkins University, says the trillions of dollars in Federal stimulus spending along with rising commodity prices, like oil, will increase inflation. And, when the Fed raises interest rates after the 2010 elections to restrain inflation, the economy will tank again. He and others say the economy should then experience growth for at least several years. [3]

Not so fast, says another group which believes the "L" in WLUV stands for long-term recession. Its members don't think the growth forecast for a "W" recovery can last. These experts believe our economy will remain flat for many years just as Japan's did following its massive asset-price bubble which burst in the late 1980s. Japan suffered from deflation and experienced years of sluggish growth which continues today. [4]

However, most economists now think the U.S. recovery is in full swing as a "U"-shaped rebound, while acknowledging growth will be slow and gradual. A USA TODAY survey in August reported that 63-percent of the economists polled feel the recovery will take this route. They point to the $13 trillion consumers lost in their homes and stock market as to why consumers will be tight fisted for the foreseeable future. [3] This was underscored when consumer confidence fell to its lowest level in four months in August. High unemployment and dismal personal finances were the reasons given. [5]

The most optimistic recovery view says it will take a "V"shape. Experts with this view believe we have no where to go but up now. Driving this theory they say is pent up consumer demand, a growing population, stimulus programs that kick in next year, and a projected drop in unemployment beginning early next year.

So, with all these conflicting views, we must move more cautiously than ever and get all the guidance [6] we can to make good investment decisions as the recovery proceeds.

[1] http://www.washingtonpost.com/wp-dyn/content/article /2009/08/21/AR2009082101273.html

[2] http://industry.bnet.com/financial-services/10002612 /recession-nearing-an-end-but-economic-recovery-will -take-years/

[3] http://www.usatoday.com/money/economy/2009-08-12-eco nomic-recovery-shape_N.htm

[4] http://en.wikipedia.org/wiki/Recession_shapes

[5] http://www.cnbc.com/id/32595112

[6] http://www.nber.org/releases/

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