U.S. Economy--Recovery In Sight?

President Obama warned Saturday it would take 'many more months' for the U.S. to get out of recession even after GDP figures for the 2nd quarter were much better than expected, showing the economy shrank only 1% as against an expected 1.5%. What seems to worry him most is the worsening unemployment situation as figures due out next week are expected to show that more Americans are losing work.

Dr. Roubini had earlier expressed similar views. He said the recession will last roughly 24 months and will be over by year's end. 'I am not forecasting economic growth before year's end', he said.

Nevertheless the consensus is that the worst is definitely behind us and the economy should be returning to the growth path. The only debate now is over how soon recovery will start and how strong it will be. Analysts are now willing to stick their necks out and are predicting that recovery will start in the 3rd quarter itself. The most important reason for this, they say, is inventory rebuilding after businesses aggressively liquidated inventories in the earlier part of the year. Boosted by the 'cash for clunkers' scheme auto demand is expected to increase as is the demand for other consumer durables. The residential housing downturn also seems to have finally hit bottom and there are welcome signs of a rebound. Countrywide home resales in June are up 9% since January this year and the sales of new homes has risen 17%. Construction has climbed 20% and prices are showing signs of perking up. The impact of the fiscal stimulus as well as increased government spending is beginning to be felt.

What now worries analysts is whether the recovery will be a 'W' shaped one or it will be a steady climb out of the financial abyss. There is a definite possibility of the former as once the impetus provided by boosting inventory levels loses steam the economy may start a second leg downwards. Other factors contributing to this possibility are weak final demand due to high rates of unemployment, continuous de-leveraging by the private sector and excess capacity in the economy.

Dr. Roubini feels we are in a deep 'U' shaped recession and that recovery will be weak with growth averaging about 1% over the next couple of years. The latest GDP numbers have however led many analysts to revise growth projections sharply upwards from 0.5% to 3-4% in the third quarter as firms rebuild business inventories and housing ceases to be a drag. Growth is expected to soften once again over the longer term as the economy struggles to create jobs once again. Even the FOMC expects the labor market to improve gradually only from 2010 onwards, and the economy may take five or six years to converge to a sustainable growth rate.