Is 'V'-Shaped Recovery Possible For U.S.Economy?

Now that most economists agree that the worst is over as far as the recession is concerned,the debate is shifting to what comes next.Various theories have been put forth regarding the shape of the recovery that will follow.You can choose from 'L' shaped,'U' shaped,'W' shaped,'staircase' shaped,'stop and go economy' etc. according to your own convictions.The list is long and the arguments for each are quite compelling.

Now James Glassman,senior economist at JP Morgan in New York has stuck his neck out and predicted a 'V' shaped recovery for the U.S. economy.He is supported by Lawrence Meyer who is a former Fed governor.JP Morgan expects growth in the coming quarters to exceed forecasts of 3 to 4 percent.Meyer expects growth to increase by 3.6% in 2010 and by 3.9% in 2011.They feel this is entirely possible because of large 'pent up' consumer demand.

These growth figures may be extremely optimistic given that since 2001,while the economy was booming,the growth rate exceede 3% only once in 2004.There are other equally convincing arguments which have been put forward against the above theory.It has been suggested that so called 'pent up' demand as a driver of growth works only if there is no spare capacity in the economy. In such a scenario any increase in demand immediately sets in motion the entire cycle of increasing prices,fresh investments and increasing employment.Presently there is plenty of spare capacity in the economy.Latest inflation figures show that consumer prices remained unchanged in July.Furthermore the Reuters/University of Michigan preliminary index of consumer sentiment fell to 63.2 in August from 66 in July as against forecasts of a rise to 69. Increasing unemployment is clearly taking its toll,and it is expected to touch 10% from 9.4% currently,before things get better.

Another reason why growth is likely to remain subdued is that U.S. households are burdened with debt. Due to large scale unemployment,the debt burden and difficulty in getting fresh loans,the savings rate has jumped from about zero to 8% presently and may go up further. After having pumped in about a trillion dollars into the banking system, the Fed is also likely to take a breather, although the easy money policy will definitely continue till the economy is well on its way to recovery.The Fed is only too aware that pumping unlimited amounts of money into the system may ultimately lead to runaway inflation.The unpreceented destruction of household wealth and the deleveraging of the economy in the wake of the financial crisis are other factors working to reduce demand.

Professor Nouriel Roubini holds an opposite view. While conceding that the recession will end sometime towards the end of this year,he warns that the U.S. economy is likely to witness sub-par growth of around 1% for the next couple of years.