A Longer Rebound than Normal?

Looking back at the past nine recessions, there has been a definite correlation between the depth of recession and the strength of subsequent recovery. Considering the pent-up demand created because of the extent to which businesses cut back on production, inventories and payroll during a downturn, the reverse response during the eventual recovery is understandable.

For example, following severe slumps in 1973-75 and 1981-82, real GDP grew 6.2% and 7.7% respectively. Recently the average forecast of 52 economists – surveyed by Blue Chip Economic Indicators – call for growth in real GDP of 2.7% over the next four quarters. During the same nine previous recessions, real GDP has never required more than three quarters to regain its peak level prior to the downturn. Can history not predict the strength of our next recovery?

If not, the lingering credit crisis may be a major factor as households may need longer to reduce debt and save more before increasing spending, limiting the business sector’s recovery.

So far, surprisingly positive data in recent weeks supports the historical, upbeat recovery scenario. Only time will tell!

(Source: Business Week, 12 Oct 2009)