Recovery could happen this year, but will likely be weak

Two new economic surveys offer a mixed bag for investors regarding the U.S. economy, but also present a plausible outlook for business conditions.

The first, the Blue Chip Economic Indicators (BCEI) newsletter, expects the economic recovery to start in the second half of 2009, Reuters reported. The second, a new Bloomberg News economists survey, sees a milder recovery than forecast earlier.

The BCEI newsletter sees U.S. GDP contracting 1.6 percent in Q2, then rising 0.5 percent in Q3, and 1.8 percent in Q4. For all of 2009, the newsletter expects the U.S. economy to contract 2.6 percent, followed by a 1.8 percent expansion in 2010.

Spotting the bottom?

"The past month provided fresh evidence that the decline in business activity is starting to moderate, buttressing consensus expectations that the economy will emerge from recession in the second half of this year," the newsletter said, Reuters reported.

Meanwhile, the Bloomberg survey sees Q2-Q4 growth rates of a contraction of 1.9 percent, followed by expansions of 0.5 percent and 1.8 percent, according to the median forecast of 61 economists.

Further, in addition to an early start date, Q3, for the recovery, the surveys also agree on another dimension, but this one is a negative: the U.S. unemployment rate. Each sees a high eight percent unemployment rate continuing through 2010, due to the mildness of the recovery. The BCEI sees unemployment hitting 10 percent in 2010, while the Bloomberg survey sees it peaking at 9.6 percent in the same year.

New York Times (NYT) columnist and Nobel Prize-winning economist Paul Krugman, said in light of the U.S. economy's likely recovery track, stocks have gotten ahead of themselves.

"It looks to me now as if the markets are now pricing in a rapid recovery, that they're pricing in a V-shaped recession, which I consider extremely unlikely," Krugman said at a forum in Shanghai Tuesday, Bloomberg News reported. "The market seems to be looking as if this is going to be an average recession, but it's not." A V-shaped recession contains large job growth in at least the initial stage of the economic recovery.

Further, while other economists have expressed concern about the U.S.'s large monetary and fiscal stimulus increasing inflationary pressures, Krugman, among others, for more than a year have argued that the greater risk to the economy is deflation. These economists say the decline of housing, stock, and commodity prices, and reduced demand from the nation's 8.9 percent unemployment rate, will far outweigh any price pressure the monetary easing and stimulus package could create.

Economic Analysis: The two surveys are consistent with recent comments by former U.S. Federal Reserve Chairman Paul Volcker and earlier research by economist Martin Wolf regarding the likelihood of historically high unemployment persisting for a long time. Typically, one would expect the U.S. unemployment rate to start to decline about three to six months after the recovery starts, although this did not occur in 2002. That year, the first year after the 2001 recession, saw the U.S. economy continue to shed jobs. Now, it appears, the current recession and recovery will follow a similar pattern: no or low job growth for at least the initial phase of the recovery, keeping the unemployment rate high. That may very well test the limits of the U.S.'s social safety net.

For investors, the above provides further evidence of a U.S. economy that's restructuring in the new "frugal consumer" era, post-financial crisis. Millions of jobs in manufacturing, financial services, and retail will be shed as the U.S. economy becomes based more on production, quality of life, and infrastructure concerns, and less on consumer goods. That transition will take a decade (or more) and will not be without pain, but ultimately it will lead to a more productive, more capital rich and balanced economy.

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