Commentary by Brendan Moynihan
Sept. 2 (Bloomberg) -- What shape will the U.S. economic recovery take: L, U, V, W, square root or maybe even Riemann’s zeta function?
Many economists and pundits, trying to explain why “it’s different this time,” are groping for new metaphors to explain their forecast for how the U.S. economy will emerge from recession.
Economists long ago gave us descriptions of L-shape recoveries (never happened), U-shape (also never happened) and the W-shape (happened once, for reasons explained below). The triple-U recently made it into the lexicon. And Societe Generale’s Albert Edwards served up the Armenian letter K in a June 4 report.
Commentators unwilling to be constrained by the letters of the Roman alphabet turned to symbols, in May giving us the character for “bank” (it resembles a sickle) used in the Pitman shorthand system for taking dictation. In an interview on Bloomberg Television with Scarlet Fu on July 7, Hans-Guenter Redeker, global head of foreign-exchange strategy at BNP Paribas SA, said the recovery will look like a “square root.” Bank of America Merrill Lynch, in an Aug. 17 report titled “The Shape of Things to Come” also used that symbol.
At the rate they are going, they’ll soon be using Riemann’s zeta function shape (a sort of spiral). Meanwhile, key economic indicators are defying them all with a V-shaped trajectory that typifies economic recoveries in the U.S.
Defying History
The new metaphors project stagnant growth for the next several years, breaking with all precedent in post-World War II recoveries. Business cycles differ in nuance, but all of them are cycles. And history shows that the deeper the decline, the stronger the V-shaped rebound.
The last time the gross domestic product contracted more than the 6.4 percent registered in the first quarter of 2009 was the 10.4 percent contraction in the second quarter of 1980, when President Jimmy Carter told Americans to cut up their credit cards. They did, en masse, and many mailed the clippings to the White House as evidence of their support.
The famous “double dip,” or W-shape recovery of 1980 and 1981 happened because the Federal Reserve, under the leadership of Paul Volcker, raised interest rates, lowered them, then raised them again. Soaring interest rates (mortgage rates rose as high as 18 percent) sapped demand for homes, and homebuilders mailed two-by-fours to the White House to show their disapproval of the Fed’s handling of the economy.
‘Different This Time?’
The Fed at the time was still trying to figure out how to conduct monetary policy, having just removed regulated interest- rate ceilings and deciding to target the money supply instead of interest rates.
The median forecast for third-quarter U.S. GDP is 2.2 percent, according to Bloomberg surveys. By comparison, since 1945 the average annualized real U.S. growth in the first two quarters of a recovery is 7.1 percent. Again, the pessimists say “it’s different this time.”
They cite unemployment and the housing market as the principal reasons for anemic growth in coming quarters and years.
Unemployment is a lagging indicator of economic activity and is making its own V-shape rebound right now, reinforced by continuing jobless claims, which already have that trajectory. The housing market is showing signs of life. The S&P/Case- Shiller home-price index, which tracks 20 metropolitan areas, rose in 18 cities during June, and new single-family home sales are flashing the typical V-shape recovery.
Metaphoric Blunder
For a group that collectively failed to predict the financial crisis or the depth of the economic contraction, economists’ recovery metaphors for why “it’s different this time” are suspect. As for the handful who may have predicted the events of the past two years, they are unable to envision a recovery. Winston Churchill once said a fanatic is someone who can’t change his mind and won’t change the subject.
Let’s hope the metaphor-hunting economists don’t stumble upon Wallace Stevens’s poem “Motive of Metaphor,” which ends with the letter X.
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