Fallout: The Financial Crisis

Weekly Wrap: A recovery like U, V, or W

Marketplace Staff Apr 10, 2009
Fallout: The Financial Crisis

Weekly Wrap: A recovery like U, V, or W

Marketplace Staff Apr 10, 2009


Kai Ryssdal: Pretty much all the economists you talk to say the recession is going to end sooner or later. They just never say which it is. Sooner. Or later. That, of course, is the question of the day. To help us do the weekly wrap of Wall Street and beyond, we’ve got Katie Benner with us from Fortune magazine. And Mike Mandel. He’s the chief economist at BusinessWeek. Hello to you both.

Katie Benner: Good to speak with you.

Mike Mandel: Glad to be here.

Ryssdal: Mike, let me start with you and ask for a little compare and contrast. We had Lawrence Summers yesterday saying, you know, the free fall’s going to be over soon. The president said this morning there is a glimmer of hope. And yet, there have been some surveys out saying, you know what, nothing’s really going to get better until like 2010. Whom are we to believe?

Mandel: Well, these two things are completely consistent with each other. On the one hand, we may see the economy start to turn around in terms of GDP towards the second half of this year. They’ve pumped so much into the economy that you’ve got to feel like the bottom is somewhere close. But the labor market, which most people think of as the economy, may not recover until 2010, or maybe even later.

Ryssdal: Alright. Well, Katie, help me out here. Isn’t everybody saying — or aren’t a lot of people saying — listen we need to get jobs back into this economy before anything can really turn around?

Benner: Certainly. I think that people feel that consumers won’t start spending until they believe that they’re going to have a job for more than six months out. And, you know, obviously consumer spending is a huge part of the economy. We will recover, but right now we’re at a spot in the recovery that’s very, very fragile, where we have banks that are earning money because interest rates are so low; It’s hard for them not to make money when they can borrow at zero. But at the same time, they still have to deal with these legacy assets. It’s a sort of a push and pull. Consumers are in the same place. We stopped spending so much, so in the first quarter our earnings were better and we didn’t spend as much money, so we didn’t go as much into debt. And yet we might have debts that we still need to take care of. So we’re also in a fragile place.

Ryssdal: All right. But a word like fragility, Katie, doesn’t really inspire confidence now does it?

Benner: OK, fragility is not a word that inspires confidence. But I think that it’s an accurate word.

Ryssdal: Michael, what about you? Do you pick up on that sense of fragility?

Mandel: Well, there is fragility. But it’s interesting. If we think about consumer spending, for example, we all know that consumer spending is supposed to be two-thirds, or 70 percent of the economy. But that number’s actually deceiving, because a big chunk of what the government counts as consumer spending is actually health care spending, which is coming mainly — a large quantity from government money like Medicare and Medicaid. You know, it also includes other things that are not outlays from the consumer wallet. And so, in fact, we could have an OK recovery before we have a recovery in the job market and before consumers actually start feeling confident. We don’t need consumers to start spending before the economy starts to pick up.

Ryssdal: Mike, let me ask you about, you know, the shape of this recovery. A lot of people have said, well you know, it could be a U recovery — it comes down real hard and then comes back up. There’s been some people talking about V — where it gets to a point and then bounces up nicely. And then I heard the other day, some guy say, well you know, it could be an L-shaped recovery, which doesn’t really sound like a recovery to me at all, right? It goes down, and then it sort of flatlines. What do you think?

Mandel: Or it could be a W, right, where it goes back up, goes back down, comes back up again. Right at this point, I’m actually sort of split. I wouldn’t be surprised to see a V towards the end of this year, early next year, because in fact, they’ve put so much stimulus in both monetary and fiscal. On the other hand, there are these drag factors. So, right now I think the real question is not about whether or not there’s going to be a recovery, but really how sharp and how strong it’s going to be in terms of GDP.

Ryssdal: Katie, what’s your favorite letter?

Benner: I would say W actually.

Ryssdal: Really?

Benner: It’s interesting, the government has had — I was talking to a couple of different economists and then investors like George Soros out there, who also see a W. And their reasoning is that we’ve had to pump so much money into the economy — so much just to keep it on life support and to keep it going, and then to improve it — that eventually that money is going to have to be yanked out very, very quickly in order to prevent hyper-inflation or even just inflation. And when that happens it will put the brakes on the economy again. And so we’ll see a dip before we go back up, and I think that’s an interesting argument for the W.

Ryssdal: Katie Benner at Fortune magazine. Mike Mandel, chief economist at BusinessWeek. Thanks guys.

Benner: Thank you.

Mandel: Thank you very much.

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