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VERSACE: What kind of recovery lies ahead?

- The Washington Times - Friday, September 18, 2009

OPINION/ANALYSIS:

Earlier this week when I was on The Washington Times' nationally syndicated radio show "America's Morning News" co-hosted by Melanie Morgan and John McCaslin, we talked about how there was more than a fair amount of economic data coming out this week. These data, in my view, are particularly important given the "recession eulogy" speech delivered in the early part of this week by Federal Reserve Chairman Ben S. Bernanke in which the message was the recession is "very likely over."

As Investopedia describes it, a recession is "a significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade."

What should be pointed out is that the term "recession" refers to the period of economic contraction and not what happens when the contraction is over. While signs have emerged over the past few months that the contraction has slowed, if not stopped, as depleted inventories are rebuilt, the question that is increasingly being asked is: What kind of recovery lies ahead?

There are several types of recoveries -- W-shaped, U-shaped, V-shaped, L-shaped and the much talked about jobless recovery. As one might suspect, the shape of the letter is more or less an indicator as to the trajectory of the recovery.

A V-shaped recovery involves a sharp decline in several economic metrics such as employment and gross domestic product followed by a sharp rise back to their previous peaks. By comparison, a W-shaped recovery involves a sharp decline in these metrics followed by a sharp rise back to the previous peak, followed again by a sharp decline and ending with another sharp rise. The middle section ofthe "W"can represent a significant bear market rally or a recovery that was stifled by an additional economic crisis. An L-shaped recovery involves a sharp decline in these metrics followed by a long period of flat or stagnant growth.

Casting aside the letters, a jobless recovery is an economic recovery after a recession when the economy as a whole improves but the unemployment rate remains high or continues to increase over a prolonged period of time. This effect may be a result of cautious businesses that add hours to existing employees in order to increase production capacity rather than hiring new workers.

A jobless recovery occurred in the early 1990s. While the American recession from the late 1980s technically ended in the first quarter of 1991, the unemployment rate did not stabilize until the middle of 1992.

Looking at a chart of the Standard and Poor's 500 Index over the past 12 months, we can see the signs of a V-shaped recovery in the stock market. By comparison, if we look at much of the economic data, we see a different shape altogether. For the most part, economic contraction has stopped and the pundits are looking at new economic data to determine the shape of the pending recovery. Several are calling for an L-shaped recovery while a few are warning that we are likely to experience a double-dip recession and as such a W-shaped recovery when it happens.

While the jury is out on the shape and timing of the eventual recovery, there is agreement that any near-term recovery is likely to be jobless. The unemployment rate has continued to creep higher and initial jobless claims for the week ending Sept. 12 were reported Thursday. While a tad better than expected, the data showed 545,000 initial jobless claims and continuing jobless claims, a more important metric in my view, were 6.23 million for the week, which was higher than the 6.1 million the prior week.

This concern is underscored by recent Gallup Poll numbers that showed while consumer confidence has improved job creation lags. Per the Gallup data, 41 percent of Americans say the economy is "getting better" versus 16 percent a year ago, even though 44 percent still said the economy is "poor now."

The underlying issue in my view gets back to the unemployment rate, ongoing jobless claims and the lack of job creation. The same Gallup Poll shows that only 22 percent of employees are saying their companies are hiring versus 24 percent a month ago and 39 percent a year ago.

With that as a backdrop it's easy to understand how the Consumer Comfort Index remains in deep negative territory and calls into question prospects for consumer spending now that the "cash for clunkers" government program and the back-to-school season are behind us.

Another issue to consider is how those industries that are tied to job creation, such as the housing sector and new housing starts, will fare once "oh-so-low" inventory levels are replenished. The same concern can be raised for other areas of the economy, such as manufacturing, that are poised to benefit from inventory restocking. One to watch is the automotive industry and how it is or is not performing post-cash for clunkers.

Time will tell if this is an L-shaped or W-shaped recovery. As always, the details are in the data.

Chris Versace is director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston. He can be reached at cversace@ washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.