Another*s

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Some economists were saying in April that there is no doubt that the US is experiencing a recession and the debate is moving towards the shape of the recession.

First, let's look at the four kinds of shape:

A "V" shaped recession is usually short, and fairly shallow like in '90-'91 and '01. Both of those recessions lasted 8 months.

A "U" shaped recession is longer and possibly deeper.

A "W" shaped recession is a double dip (like in '80 and '81/'82).

An "L" shaped recession is like the experience in Japan in the '90s.

Nouriel Roubini (Professor of Economics at the Stern School of Business at NYU) said it is going to be a U-shaped recession which will last at least 12 months and possibly as long as 18 months. He gave three reasons:

1. We are experiencing the worst US housing recession since the Great Depression and this housing recession in nowhere near bottoming out.

2. In 2001 it was the corporate sector (10% of GDP or real investment) to be in trouble. Today it is the household sector (70% of GDP in private consumption) to be in trouble.

3. The US is experiencing its most severe financial crisis since the Great Depression. This is not just a subprime meltdown. Losses are spreading to near prime, prime mortgages, credit cards, auto loans, student loans, leveraged loans, muni bonds, industrial and commercial loans and corporate bonds.

Calculated Risk said he think the recession will linger and a double dip, "W-shaped" is very possible.  The recent fiscal stimulus that will provide a tax rebate to US hoseholds in May-June could lead to a positive economic growth in Q3 after negative growth in Q1 and Q2. But the increase in the unemployment rate on the horizon will make the recession much severer.

Mike Shedlock said he fell like an "L" or a "WW" kind of scenario with the US slipping in and out of recession for a prolonged period of time, perhaps 3-4 years or more. Roubini don't think it will be "L" because the US acted faster than Japan. Shedlock don't buy that based on these reaons:

1. US consumers are in much worse debt shape than Japan.

2. There is global wage arbitrage now that did no exsit to a huge degreee in the mid to late 1990's. Even white collar jobs are increasingly at risk.

3. The savings rate in the US is in far more need of repair than what Japan faced. This will be a huge drag on future spending and slow any recovery attempts.

4. Japan faced a huge asset bubble (valuation) problem. The US faces both a valuation problem (what debt on the books is worth) and a rampant overcapacity issue as well.

5. Japan had an internet boom to help smooth things out. There is no tech revolution on the horizon that will provide a hugh source of jobs.

Interesting. We will see who is right. And what about your opinion?