Zarnowitz without a V - the shape of recessions will be different

Victor Zarnowitz was the father of business cycle analysis. There were others who came before Zarnowitz but few did as much analysis over the their lives in a single focused subject. Zarnowitz argued that steep recession will lead to steep recoveries. The faster you go into the recession tank, the faster you will exit which is the basis for the V-shaped recovery. Given we have significant evidence of this from past business cycles, it would be very normal to see the stock market start to rocket up and the Green Shoots of a recovery start to have significant impact. Unfortunately, the facts are different in this case.

Credit driven business cycles will last longer and show slower recovery. The normal V-shape would apply for inventory driven recessions. Under the inventory cycle story, inventories will build which causes a swift slowdown. Then there is a cut in the stocks which lead to new production. This could easily apply to the housing market in the US, but you have a different story if there is a credit crunch also associated with the inventory problem. Under the credit crunch banking problem which based on the research of Ken Rogoff of Harvard, there is a longer time for for the the banking sector to be cured and an ex tented time for the credit channel to be fixed. It requires a significant amount of fiscal stimulus and government debt.

While ch story is unique, the banking credit crisis scenario seems to fit the existing facts. The Zarnowitz effect may not apply this time around.