With the release of the April Jobs report a few weeks ago, job losses were not as great as the previous months. This decrease in job losses is consistent with an array of other recent economic indicators suggesting that the recession could be getting closer to a bottom. That perception is being increasingly discussed by officials at the Fed and others in Washington, who believe the economy should move on to a positive growth track sometime during the second half of the year. If this is correct, the deepest recession in the postwar period will come to an end. The end of a recession doesn't necessarily translate to robust growth. As we possibly move closer to the end of the recession, the question to ask is “what will the recovery period look like?”
Historically, very deep recessions tend to be followed by very robust recoveries. That was the case following the three deep downturns of 1957-58, 1973-74 and 1981-82. Conversely, the mild recessions of 1990-91 and 2001-2002 were followed by relatively mild growth. Most likely the eventual recovery is probably going to resemble the mild type rather than a typical strong growth period following a deep recession.
The recessions of the 1950s, 1970s and 1980s were brought on by an inflation-fighting monetary policies by sending interest rates higher and restricting credit availability. Once the inflation threat moderated during the recession, the Fed would reverse monetary policy, lowering rates and increasing liquidity in the economy. Personal consumption would in turn increase sharply, launching the economy into a robust recovery.
In our current situation things are slightly different. Our current recession was not brought on by tight monetary policy but by an unprecedented housing meltdown and credit crisis. The housing collapse has vaporized trillions of dollars of household wealth that will take many years to rebuild. The Fed lowering interest rates and increasing liquidity, as it has done in this cycle, is a function of trying to stop the economy from falling off a cliff and providing support to the financial system. Currently, with consumers deleveraging and reducing expenditures, there is hardly any pent-up demand that could spur consumer spending into a brisk recovery coming out of this recession.
Based on our current situation, we could expect economic growth to lack the firepower typical of a reversal from a deep recession and the eventual recovery will likely turn out to be much weaker than usual, at least here in the U.S. It is possible that a recovery could be weaker than normal for longer than most expect. We should expect there will be sectors of the economy that see above average growth while many sectors experience below average growth.
