The Economic Recovery: Fast, Slow or Neither?

Some Analysts Predict a Sharp Rebound While Others Foresee Sluggish Growth; a Few Say another Slump Is Possible

The U.S. economy is pulling out of its deepest and longest recession since the Great Depression. Some economists expect a powerful recovery, others a sustained but muted one. Some even say it will be neither: a fleeting rebound quickly followed by a second slump.

For Americans beleaguered by almost two years of economic pain, the contours of the recovery will determine how many people linger without jobs, whether cutbacks to public services are restored and how quickly savings and investments gain value.

Economists trying to predict the shape of the recovery look for parallels in previous recessions. But the current downturn, which started in December 2007, has echoes from a multitude of economic slowdowns.

It featured the same kind of deep dive in economic output of the 1970s and 1980s recessions, which were followed by sharp rebounds. The credit shock from the latest downturn also recalls the milder credit headwinds of the early 1990s, which turned a relatively short recession into a slow multiyear recovery.

But what distinguishes this recession from most others before it is a severe credit contraction whose effects, some economists believe, are likely to linger for years.

Whatever the structure of the recovery, many consumers won't detect a change in their own circumstances. So many jobs have been lost that the unemployment rate will remain high when the economy begins to rebound. Large swaths of still-jobless Americans will have exhausted their severance payments and unemployment benefits, putting them under further strain even as the overall economy picks up again. And once consumers find new work, their depleted savings will leave them more vulnerable if they were to face another job loss in the next few years.

Some sectors of the economy -- and regions of the country -- are likely to recover earlier than others. The manufacturing and housing sectors, for instance, have contracted so deeply that they are likely to start recovering soon. But the troubled financial sector still is in the process of contracting as banks reshape their balance sheets, putting its recovery further down the road.

The U.S. economy is pulling out of its deepest and longest recession since the Great Depression, but the path of recovery remains uncertain. The turnaround could go one of three ways.

Facing a range of potential recovery scenarios, Americans are displaying everything from strong optimism to anxious caution. In recent months, investors have seemed hopeful about the prospects for a robust recovery, pushing stocks up more than 40% from their recession lows in March. Private-sector forecasters in the latest Wall Street Journal survey say the economy is starting to expand, but to expect slow to modest growth of between 2% and 3% next year. Most businesses remain hesitant, bracing for a painful year ahead.

After Steep Drop, a Sharp Rebound

The most common path for the economy after a severe contraction has been a huge rebound in economic activity. Employers usually slashed their payrolls and output so sharply to protect themselves, and consumers postponed so many major purchases during the worst of the downturn, that a return to growth came with a fierce expansion.

After the deep recessions of the 1970s and 1980s, business activity rebounded and within several months employers were rapidly rebuilding their payrolls. "You can't find a single deep recession that has been followed by a moderate recovery," said Dean Maki, chief U.S. economist at Barclays Capital. And most forecasters proved to be too pessimistic as prior deep recessions ended. "Very few people were looking for the kind of growth numbers that were actually printed," he said.

Economic Anxiety Keeps Growth Slow

The economy may bounce back, but plenty of barriers block the path to a sharp rebound. Trouble with spending and lending could potentially make the recovery a slog.

Consumer confidence is falling as job losses mount -- albeit at a slower pace than before -- and homeowners reshape their finances after severe declines in home values. Households are saving more than they have for most of this decade. That's suppressing consumer spending, the engine for 70% of economic output.

The credit shock is likely to impair the business and consumer sectors for years. Businesses are less likely to get easy loans as banks shrink their balance sheets. That's also true for homebuyers who are finding it harder to get new loans and would need to offer up larger down payments. And, as real estate prices have tumbled, existing homeowners can't borrow against the value of their homes as they once did.

The credit headwinds "will continue to hang over the economy for a long time," said Nigel Gault, chief U.S. economist at Global Insight.

"It is one reason not to expect a strong recovery coming from the consumer side. It doesn't mean consumer spending won't grow, but it won't be a big leader the way it has been in previous expansions."

So after a quick bounce, proponents of the slow-growth view say the economy is more likely to expand at a 1% to 2% rate over the next year -- well below the 4% to 5% that's necessary to heal the labor market after a deep downturn. Recessions caused by bursting bubbles like the recent housing collapse -- as opposed to sharp rate increases by the Federal Reserve to thwart inflation -- seem to be followed by jobless recoveries.

Businesses are finding ways to stretch their existing resources rather than expect a rebound.

"People are very frightened," As people don’t know what to expect in the coming months, years hence there is a sense of fear and apprehension among people and they are adopting a strategy of wait and watch.

The payroll is down to about 70 employees from 200 several years ago, and companies are not in a rush to hire more workers back. Instead, the firm is automating more of its operations, putting computers on every desk and squeezing more out of existing employees.

The productivity is way up, because the people who are left have to work harder,

With a strong focus on productivity -- remaining employees picking up the slack -- some companies are likely to avoid rehiring workers as long as possible, keeping the rest on the jobless rolls even longer.

A Brief Rebound, Then a New Slump

The economy is likely to see a natural boost in the coming months from a rebound in production. After that, it will get some help from the bulk of the fiscal stimulus program late this year and early next year.

But then what?

The slack in the economy is so large that consumers won't see meaningful raises for years, and they will have less borrowing power to drive their spending. So consumers could make some of the big purchases they have been postponing and then close their wallets to save more.

Businesses, after a frightening period, could remain cautious about ramping up after a severe downturn. State and local governments could continue to cut back as tax revenue plummets. And the troubles aren't over for the banking sector. Foreclosures are still shooting up as loans go bad.

Once the boost from the federal government diminishes, the economy could still be without a major driving force such as consumer spending or business investment to push it forward -- risking a return to its concretionary phase. After a brief six-month recession in 1980, the economy recovered but then relapsed within a year. Soaring inflation forced the Federal Reserve to raise interest rates to double-digit levels, pushing borrowing costs higher and spurring a painful and lengthy recession. The late 1940s and 1950s each saw recessions return just three years after the prior downturns ended. That is because businesses can bounce back from crises -- such as wars -- but then find that the recoveries aren't durable.

Today's fear is compounded by the heavy federal spending. Some economists worry high deficits will push interest rates -- and borrowing costs -- higher for consumers and businesses.

Hope we don't have a double-dip recession, but that's a possibility, so will all the money spent by all the central banks bring productive results or just result in a state of high inflation.