The Shape of the Economic Recovery Poses Three Alternatives

There seems to be unanimity that recovery is taking place and that recession is over – although it has not been officially declared. The debate among the experts is about what shape it will take – will it be U, V or W?
U will represent a slow and steady revival; V will be sharp ups and downs while W will be wobbly going up and down. The recent recession does not fall into any typical category. A survey conducted by USA TODAY showed 63% of the economists saying that recovery will be U shaped – slow and steady. 37% felt it would be either moderate or may be fast. A smattering group felt it would be W with the nascent recovery sliding back into recession before making a final turn.

Those who are predicting a U shaped recovery including Ben Bernanke the chairperson of Federal Reserve said that recovery signals have been flashing. Factory output has been the best since the last two years. The government orchestrated cash-for-clunkers programme has infused new life into the dying auto industry. The inventories in the stores and the manufacturing units having been depleted the factories are poised to start production in full swing.

But the majority of the pundits feel that the recovery will be subdued because consumers are still wary about loosening their purse strings. Having lost nearly $13 trillion in wealth following the crashes in the housing and stock markets, the ordinary citizen seems to be determined to save and not spend. This was the view of Mark Zandi of Moody’s Economy.com. The savings figures spiked by 5.2% during the second quarter from the 1% noted prior to the debut of the crisis. The economy is heavily reliant on consumer spending – as much as 70%.

With the unemployment rate at 9.4% the consumers are focusing only essentials comprising of food and medicine said Sung Won Sohn of California State University.
A robust recovery depends on the housing and automobile markets. These are suffering from deep rooted troubles that will not easily fade. Nearly 1.8 million excess housing units had been constructed during the time of the housing bubble. This is a dampener to rapid recovery. Foreclosures instead of decreasing are increasing despite various measures taken by the government. Sale of vehicles has been restricted by credit freeze making it difficult for potential buyers to avail of loans. It will require some time before the banks feel comfortable again and start lending once more.