Between a U, a V and a W...

I think we can confidently rule out a V shaped recovery at this stage which leaves us with a U shape with its longer "slump" and a W shape, better known as the double dip. The difficulty in forecasting how the current environment will unfold stems from the lack of any historical precedent from which to make inferences (a bit like trying to guess the source behind the commodities spike). Taking a look at the most recent economic figures would have you believe that the economy is exhibiting a remarkable degree of resilience considering almost 10 months of turmoil. Sure, an economy jolted by an ongoing housing recession, a credit squeeze, shrinking real wages and skyrocketing commodity prices is showing signs of fatigue through deceleration, rising unemployment and a steady contraction of profit margins (first quarter earnings were on average 26% lower than the first quarter of last year), not to mention the recent collapse in consumer confidence. What is baffling, however, is when using the past for guidance, at this stage of a slowdown we should be observing an overhang in inventories and investments (we have only observed it in housing so far), businesses should be shedding a far greater number of workers, consumers should be consuming much less and the economy should actually be contracting rather than just decelerating. Instead we have what seems to be a mild response to a major crisis, or a sneeze through which you catch a cold but not the flu! Maybe in the new world we live in the shock absorbers are much thicker which makes the lags much longer and therefore it is just a question of time. It could also very well be that the crisis was well handled by the Fed and, combined with the timing of the injection of government tax rebates, the forward looking markets are already riding a recovery wave in contrast to the lagged economic releases that are still stuck in the slowdown phase. That would in fact make the shape of the recovery more like a tight U (closer to a V). But what if markets are overly optimistic and we are in fact in a doldrums stage just before the second wave of a credit crisis (credit card and car loans anyone?) hits the markets? That would make it a perfect W double dip. To be honest, with so little past data to lean on for guidance, it is exceedingly difficult to predict how the current crisis will unravel.