The US Economic Recovery Shape and Timeline: The “V” vs. The “U” vs. The “W”

Wed 6/24/2009

The US Economic Recovery Shape and Timeline: The “V” vs. The “U” vs. The “W”

As can be surmised from my arguments below, I have never felt that we will experience a “V” shaped recovery out of the current economic malaise our country faces. The shape of the “Trough” in a “V” is completely inconsistent with the visible and invisible technicals of our economy.

On the visible side, we have nearly 24 month of real estate inventory with a positively sloped supply curve (more real-estate supply coming on-line as Arm products mature and the unemployment rate increases). The consumer is clearly tapped out of credit and overly leveraged. That suggests that consumer spending as a total part of the GDP is likely to shrink from 70% to as low as 55% of the US economy. The Obama Administration’s stimulus spending to-date has been picking up some of that slack (15% shrinkage in the US GDP equates to about $3 Trillion Dollars) but the stimulus to-date is unlikely to be enough as it has not been hitting the correct distribution targets within the economic engine of the US.

All that the stimulus has achieved so far is shoring-up horrid balance sheets, rewarding incompetent executives by giving them a longer run-way before reality has to be faced and providing informal unemployment benefits (keeping people on their jobs longer) in non-competitive and or very poorly managed sectors of our economy such as the “Auto Industry”. That sector (auto) has now been literally killed by incompetent management at the helm of those companies, and “Unions” who are unaware that protecting their interest is completely inconsistent with protecting the interest of their industrial sector and the interest of America. I will not even touch the outrageous cost of healthcare costs for these sectors while as a country and global leader, we get a ranking of 37 in the world in terms of our healthcare quality and coverage.

On the invisible side, the extent of hidden asset classes such as derivative, CDOs, credit cards (this last class is somewhat more visible) is not yet even remotely understood and is several orders of magnitude larger that the size of the visible part of the economic leverage and malaise. Instituting the right mechanisms to gain visibility in to the “invisible” part of our economy and the corresponding financial products could easily take another 6-12 months. In view of this, I would say that not only we will not have a “V” shaped recovery but we will have a “U” shaped recovery with a very long flat bottom of the “U” ( I__________I ) that would extent another 6-9 months while the consumer and commercial deleveraging continues.

I would summarily rule out the “W” shape recovery school of thought for the US Economy. You may get signs of stabilization, but that is not a spike upward from the trough. Rather evidence that we are not in the negative part of the slop and indeed are moving along the straight bottom part of the “U”. Meanwhile, ignore all technical data that erroneously mistakens opportunistic buying of stocks or real-estate in certain sectors, segments and markets as a sign of recovery rather than a sign of stagnant (neither decelerating nor accelerating) stabilization. And count on 12-14% rate of unemployment and the need for nearly $2 Trillion more in stimulus expenditure.

As a grad school professor of mine used to say: “Nothing Happens by Accident” as such all these facts must be dealt with as they are our doing. Having noted that, I would be remise not to note what a good family member, and a friend of mine, also used to say: “Keep your Chin Up and Keep Plugging Along”. So, let’s forge ahead with a set of realistic optics.