What Kind of Recession is It?
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There has been much talk about the type of recession we are in, even though it hasn’t been completely defined as yet, so I though it would be a good time to demystify some of the commentary that seems to be confusing to many people. News articles, be they of the hardcopy type or the cable news version, always make assumptions that readers or viewers understand the topic or they wouldn’t be reading or watching the subject matter. Having received a number of questions asking me to explain what is going on I thought I would give it a shot.
There are four types of recessions that are continually referred to when doing a analysis: V, W, U, and L. There may be a few others but since these are the most common let’s start here.
The “V” (in NYC terms) is the “Spaulding” (of stickball
fame) bounce as opposed to the “dead cat” bounce. These are typical Street
expressions intended to evoke an image: with the classic “pink” Spaulding
rubber ball used in stickball, the bounce is pretty equal to the force with
which the ball falls and, if you don’t catch a high one on the fly, be prepared
to have it bounce over your head. The
“dead cat” bounce is pretty evocative of the 10th life of a cat when dropped
from a roof top in
While the “market” would like to see a “V” for stocks and other investments (strong down and strong bounce right back up), and some people are hoping for it – it just won’t happen – for a wide number of reasons. What we have in the market is the response to an over reaction where the financial sector was oversold. It is now at a more reasonable level. While a “V” is good for the market its bad on the inflation front, as it assumes that demand will return with a rush that will quickly push up prices and interest rates before the Government money really has a chance to work, i.e. Government money was a waste of time and will just create an inflation push.
The “W” occurs if there is a strong reaction to the stimulus that turns everything around but the recovery is totally stimulus driven. If victory is declared too early and the stimulus is discontinued because it is believed the worst is over, everything crashes back down again. Here inflation jumps in as with a “V” but hangs on during the second crash. Again, this is a possibility if victory is declared too soon, as was done in the election campaign of 1938 and stunted the gains of the previous four years, extending the Great Depression right into World War II.
The “U”, a long bottom and a slow upturn (we are talking a minimum 5 to 10 years) is what most economists’ think we are heading for and where planning should be focused. In this scenario the recovery is long and sustained,- which will permit interest rates to stay under control. Yes, there will be upward pressure but the increased tax revenues as industry adjusts to the new reality and profits expand at an historical rate, rather than in a bubble mentality, and the consumer confidence levels increase with slow but steady employment growth, should keep things on an even keel.
Keep in mind that the stock market is not the
The “L” is a disaster all around; here the U. S. economy just stays flat at current levels. It is still a possibility and deflation is what we could be facing if the stimulus program does not work.
In good years job growth of 100,000 to 200,000 per month is considered excellent so consider how long it will take to work off job losses of more than 200,000 for ten straight months, where for a five month period they exceeded 600,000.
In an economy that was driven 70% by the consumer (and cannot survive below 60%), the key to the recovery is job growth not just a reduction in job loss. As it stands now we will break through the 10% unemployment barrier before the end of 2009. What we need to see happen is for the increase in jobless claims to back off, on a consistent basis, from the 600,000 plus per month number we have been seeing, to get under the 250,000 mark by the end of the year and by the middle of next year see actual growth begin to appear.
Over the next few months, all thing being equal – which the economists always say (all things are, of course, never equal) – we should see some mitigation in employment claims. In fact, it will probably bounce around for a few months. The stimulus funds are working their way through the system so new jobless claims should ease in certain industries. However, there are a lot more banks out there that will continue to fail and a good many companies will be filing for bankruptcy protection as well.
Where we are now is very dicey, as we could go any number of different ways. The large financial companies have stabilized and that’s good but it doesn’t mean we are anywhere close to being out of the woods yet.