With the launch of an economic recovery all but certain this year — many experts say it's already begun — the debate among pundits has turned decidedly alphabetical. In other words, what letter will the rebound resemble — U, V or W?
Typically, sharp downturns like the current one yield equally rapid, or V-shaped, upswings. But the worst recession since the Great Depression has been anything but typical, with housing and credit markets devastated. In a USA TODAY survey, 63% of economists said the recovery will be slow and gradual, or U-shaped.
Yet 37% said it will be moderate or fast. And a smattering of experts say the rebound will look like a W, with a precarious economy sliding back into recession before turning around for good. USA TODAY presents the case for each scenario:
WHY IT'S A U-SHAPED RECOVERY: A sharp downturn followed by a slow and gradual rebound.
Most economists, including Federal Reserve Chairman Ben Bernanke, predict a slow and gradual upturn. To be sure, the telltale recovery signals have been flashing green lately. Factory output and new orders grew last month at the fastest pace in two years. The government's cash-for-clunkers program has lit up a moribund vehicle market.
And with inventories of stores and manufacturers depleted, factories must soon ratchet up production just to restock.
But most experts say the recovery will be muted, largely because consumers are in no mood to open their wallets. They've lost $13 trillion of wealth in the recession's housing and stock market crashes and appear determined to sock away any extra cash they have, says Mark Zandi, chief economist of Moody's Economy.com. The savings rate jumped to 5.2% in the second quarter from a low of 1% before the crisis. Consumer spending accounts for 70% of the economy.
Meanwhile, the 9.4% jobless rate is keeping consumers "focused on necessities like food" and medicine, says Sung Won Sohn, economics professor at California State University.
Two underpinnings of a robust recovery — the housing and auto markets — are suffering from deep-seated problems that won't soon fade. About 1.8 million in excess housing units built during the real estate bubble ensure a tepid rebound in housing starts, Zandi says. Foreclosures continue to rise. And vehicle sales have been hampered by a credit crisis that's made it tough for consumers and businesses to get loans. It will take time for banks to feel comfortable lending again. While the cash-for-clunkers program has juiced sales lately, that will mean fewer sales next year, Zandi says.
"It's hard to see how the economy can get going if people and businesses can't borrow money," Zandi says. He predicts anemic growth of 1% to 2.7% over the next year.
WHY IT'S A V-SHAPED RECOVERY: Dramatic tumble produces a similarly sharp upswing.
Despite unusual obstacles in the housing and credit markets, some economists say traditional economic dynamics should still win the day, with the steep downturn producing a sharp rebound. Or at least a moderate one.
Businesses have cut their workforces far more than falling customer demand required in an effort "to get ahead of the curve," says Ken Mayland, president of ClearView Economics. "They're beyond lean, they're understaffed," he says. "They'll have to start re-employing people faster than in past recessions" just to restock.
Rising employment should boost consumer spending.