The shape of economic things to come - V,L,U, W and hook-shaped recoveries

The current talk is all about economic recoveries. It may seem a little premature for my taste, but the equity markets are sending quite a strong signal that growth is around the corner. Nevertheless, there is more talk about what type of recovery will occur and it represents almost every shape of the alphabet.

For the pessimists, we have an L -shaped recovery. We have had a significant decline and there is expected little gains as we enter a new world of slow growth. For those who are a negative but see some future, there is the U-shaped. A long period of flat growth before a good recovery. For the eternal optimist, there is the V-shaped recovery. We went down fast and will come out fast with the help of the economic stimulus. This is what every policy-maker wants. A recovery back to normal. For those who cannot make up their mind, there is the W-shaped business cycle. We will have a number of false starts before we have our true recovery. Now we have the hook, a steep decline and and then a steady but gradual recovery. Deutsche Bank, to be more technical, has defined this as the diminished sine wave recovery.

So what is it going to be? Unfortunately, most business cycles have less in common than what we may think. For the strong recovery people, there is the strong monetary effect and and fiscal stimulus. These unprecedented increases will have a stimulative effect and if there is a change in consumer expectations (back to spending), there will be a strong recovery like what OMB has forecasted. However, if the multiplier effect is not as large as expected and there is a new sense of fiscal conservatism by consumers, we will be in a situation were we the hook. The interest rate crowding out effect and the potential for tax increases will place us in a slow growth environment. The worst case scenario is the doom and gloom that leverage will be permanently taken out of the financial system and we will have to get back to a slower long-term growth path. No one wants this scenario but many current policies can move us in that direction.

Right now it is too early to say, but unfortunately, the V-shaped recovery may be the one that has the lowest chance of actually occurring in the G10. The field of alternative scenarios is just too great.