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A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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There really is a "v" in "recovery"


Borrowing from the lexicon of "Sesame Street," economists have been talking about the alphabet a lot lately.

As they search for signs of an economic recovery, learned forecasters have boiled their complex models down to a debate that a kindergartner could understand: Are we looking at a "V" or a "W"?

The "W" camp thinks we're experiencing a modest upward feint that's bound to be defeated by rising unemployment, a weak banking system and continued problems in real estate. In other words, the green shoots will suffer a case of frostbite, and we will fall back into the dire conditions that we experienced in the early part of this year.

Believers in the "V" are more optimistic. They predict a fairly conventional recovery, with several quarters of above-average economic growth. The economy has problems, they admit, but that's always the case at the end of a recession.

"With the economy just coming off the bottom of the business cycle, things look pretty bleak outside your window," says Anirvan Banerji, director of research at the Economic Cycle Research Institute in New York. "The reality of where we are, though, should not blind us to the forward-looking indicators of where we are headed."

The institute compiles a set of economic indicators that it calls the Weekly Leading Index, and on Friday it announced that the index is at a record high. That means, Banerji said, a stronger recovery than we saw after the recessions of 2001 or 1990-91 with little risk of a double-dip.

While pessimists focus on an unemployment rate that's nearing 10 percent, Banerji tries to capture what the other 90 percent of Americans are doing. They may have been petrified with fear last winter, but they have adjusted to the new reality.

"Today, they're thinking, 'The economy is horrible, but my job is OK. I'll buy if I can get a great deal,'" Banerji said. "That drives the dynamic that starts production and employment going up again. In a market economy that spreads like wildfire."

There are technical reasons, too, why this recovery may be robust. "A big part of the last year or so of recession has been a big depletion of inventory," says James Morley, associate professor of economics at Washington University.

"Even if you just remove that depletion of inventory, it would show up in the national income statistics as a boost to growth."

When businesses start restocking their shelves, the economy's growth rate could soar for a few quarters. That's one reason why severe recessions usually are followed by sharp recoveries.

Productivity growth — a measure of how much output workers can produce — has been unusually high during this recession. That could portend a vigorous recovery, Morley says, although it also may mean that employers will be slow to add workers.

In what has been a brutal global recession, some nations are already bouncing back. Australia's central bank just raised short-term interest rates to keep its economy from overheating, and Canada said Friday that its unemployment rate fell for the first time since the recession began.

Similar milestones may be many months away for the U.S. economy, but the alphabet debate itself is showing a curious sort of progress. Six months ago, we heard a lot about an "L," meaning no recovery for a very long time, or a broad-bottomed "U."

Even the pessimists, the "W" crowd, now acknowledge that things are looking up, and the case for a "V" is growing stronger all the time.
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