Economists differ on models for recovery

When economists first began talking about the V-shaped — meaning fast and strong — recovery from a recession, they had no idea they would spawn an entire alphabet soup of economic models. But there are now a whole host of lettered recovery theories to subscribe to.

Indeed, many economists, real estate experts and market analysts, appear to be ditching the idea of the V-shaped recovery this time around, and are instead lining up behind the L-shaped, U-shaped or J-shaped recovery models. (The shape of the letters, of course, refers to the charted pattern made by economic data such as retail sales or employment.)

Those last models all come with their own subtle spin on how the nation’s housing market will ultimately get on strong (or at least stable) footing again.

Nobel Prize-winning economist and New York Times columnist Paul Krugman recently wrote that “the prospect for the economy isn’t V-shaped, it’s L-ish: rather than springing back, we’ll have a prolonged period of flat or at best slowly improving performance.”

With their curved bottoms, the “U” and “J” models are somewhat similar. But the “L” suggests an even longer recession of perhaps years, such as that seen in Japan in the 1990s — or, as Jonathan Miller, president of Miller Samuel, noted, possibly like the recovery the housing market experienced after the 1987 stock market crash, which took the first five years of the 1990s.

“What’s kind of humorous about the L-shaped recovery is that ‘recovery’ means ‘improvement,’ so, by definition, L-shaped recovery means you go down and you stay flat, so you’re not technically recovering,” said Miller, who regularly blogs about economic issues. “So I think economists have expanded the English language. ‘Recovery’ now means ‘not getting worse.'”

Sam Chandan, president and chief economist at Real Estate Economics LLC, echoed that thought. “The L-shape implies that we don’t recover,” he said.

“There’s the part of the ‘L’ where you’re falling, and there’s the part of the ‘L’ where you’re kind of baseline, and there, the economy ceases to register a pulse,” Chandan said, laughing. He added, “That’s not our view.

“There are certainly signs that the pace of contraction of the economy has begun to moderate,” Chandan said. But it is certainly not going to be a V-shaped recovery, he added.

Both Miller and Chandan forecast a prolonged slump in the market before a recovery starts — perhaps best described by the U- or J-shape — both for New York and for the rest of the country.

“Our view is in late 2009, the economy will show broader signs of stabilization, not only in the housing market but in business investment and in the level of imports versus exports,” Chandan said.

Whatever shape the recovery takes, Miller said New York City will likely recover with the rest of the nation, or perhaps a bit later, since the city wasn’t hit by the recession in earnest until slightly after the rest of the country.

Miller, who recently took up the issue of the shape of a recovery on his blog, said he also was inspired by another letter altogether — the “W” propounded by Paul Kasriel, director of economic research at Chicago-based Northern Trust Global Economic Research. (In perhaps a play on former president George W. Bush leading the country into this position, Kasriel refers to it as “Dubya.”)

Kasriel argues that a massive federal fiscal stimulus package will advance the Consumer Price Index fast enough to induce the Federal Reserve “to become more aggressive in draining credit from the financial system.

“This could set the stage for another recession commencing in 2012, or perhaps some time in 2011,” Kasriel recently wrote. “So the shape of the path of economic activity we see over the next few years is not a ‘V,’ a ‘U’ or an ‘L,’ but a ‘W’ — down, up, down, up, all within four or five years.”

Miller said the “W” theory might not be that far-fetched: “I can see that, because I think we’re in the middle of an uptick in terms of public sentiment, but I’m very concerned about the latter half of this year and the early part of next year.”

Gross Domestic Product fell steeply in the first quarter of 2009, and while it is still projected to be negative this quarter, it is not expected to be nearly as bad, Miller said.

While public sentiment may be responding positively to those numbers, he noted that unemployment is still rising and will continue to rise as large corporations lay off workers. And after the seasonal spring housing upturn ends, housing numbers may sour even further as more foreclosures work their way through the system.

“So there’s just more bad to come,” said Miller.

Still, last month, some economists, including the president of the European Central Bank, Jean-Claude Trichet, were rejoicing at “green shoots,” a seasonal metaphor for tentative positive indicators that the global recession may be behind us.

Other market analysts, however, did not buy into that assessment.

“This is nonsense people are spouting about ‘green shoots,'” said Barry Ritholtz, the New York-based CEO and director of equity research of Fusion IQ, an online quantitative research firm. “If you have a terrible toothache and the pain stops, it’s not that you’re experiencing pleasure, you’re just experiencing a lack of agony.”

Ritholtz said the economy is still contracting; jobs are still being lost; foreclosures are still rising; credit is still tight; consumers are still overleveraged; retail numbers are horrendous; and, except for some commodities, prices on homes and consumer goods are declining. All of those factors, he said, spell no quick recovery.

“I’m not expecting any ‘V,’ quick recovery,” he said, going on to describe something more akin to a zigzag or lightning bolt. “We’re going to see a number of occasional bright spots and false starts, but this is not a regular cyclical recovery from an ordinary recession.

“This is the net result of 20 or 30 years of excessive credit creation, and the negatives that it caused,” he said.