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US Economy Could Recover Much Sooner Than Expected

You've heard all the gloom and doom about this recession. Now here's some good news: the economic recovery could happen much sooner—and be much stronger—than anyone thought possible.

Though the latest economic data is still giving a mixed picture, a small but growing group of economists is disputing the idea that the recession will drag on for months and that the rebound will be as weak as those following the the 1991 and 2001 downturns.

“Too many people’s idea of recession have been formed by the last two recessions,” says Robert Brusca of Fact & Opinion Economics, referring to the 1991 and 2001 periods, which were both short and shallow. "I think that's mistaken.”

“People have been talking about an L-shaped recession,” adds Michael Mussa, senior fellow at the Peterson Institute for International Economics. “The record shows you come back sharply from deep recessions” like the current one.

These economists and others see a V-shaped pattern, similar to that of the recession-recovery periods of the 1970s and 1980s. And they say there is ample evidence to support it.

Among the reasons for the new optimism: a significant easing of the credit crunch, improvement in consumer spending, a potential bottom in housing, a less-grim jobs picture and expectations that the government's massive stimulus spending could start boosting economic growth sooner than later.

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Even the Federal Reserve is signaling some optimism. After its regular two-day policy meeting ended on Wednesday, the central bank said that weakness in in the economy appeared to be slowing.

"Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower," the Fed said in a statement, suggesting it had detected an improvement in the outlook.

"The tone seemed to have been a bit more optimistic than in the previous meetings," said Greg Salvaggio, vice president for trading at Tempus Consulting in Washington.

And on Thursday, the Economic Cycle Research Institute said that the recession will probably end before the summer is out.

The research group, whose leading indicators have a solid track record of predicting turns in the business cycle, said enough of its key gauges have turned upward to indicate with certainty that a recovery is coming.

"The economy is on the cusp of a growth rate cycle upturn—a cyclical acceleration in economic growth," ECRI said in an emailed statement. "In other words, U.S. economic growth...which is still plunging deeper into negative territory, will start becoming less negative in short order."

So far, the data is showing continued weakness, though there are signs the economy is turning the corner. On Thursday, the government reported that the number of U.S. workers filing new claims for unemployment benefits fell last week. Several economists say that jobless claims typically peak six to eight weeks before the economy recovers. Since that peak now appears to have been reached in March, that would signal the recession could be ending as soon as May.

"Job losses tend to be very bad at the end of a recession,” says Bank of Tokyo-Mitsubishi’s chief financial economist Christopher Rupkey.

Consumer spending also declined in March, the government said Thursday, as the weak job market continued to pressure incomes. But overall consumer spending, which makes up two thirds of the US economy, rose in the first quarter compared with the final quarter of 2008, another sign that Americans are slowly beginning to buy again.

No one, of course, is saying the recession is over yet. But the end may be closer than people think.

Though Wednesday's initial report on first-quarter GDP showed a bigger-than-expected decline, some economists now expect a flat or slightly negative showing in the second quarter, followed by the beginning of sustained growth in the third quarter. (That’s three months sooner than what many were forecasting several months ago.)

Optimists acknowledge that existing headwinds and unforeseen events can quickly derail momentum, which may help explain why many still fall into the wait-and-see camp.

“The velocity of downturn is lessening," says John J. Castellani, chief economist and president of the Business Roundtable, who is more cautious than hopeful at this point. “In the initial part of the recovery, people will be very cautious about this being a double dip.”

Nevertheless, those forecasting a strong recovery point first and foremost to the waning effects of the Lehman Brothers collapse last fall, which roughly coincides with the worst of the credit crunch, and triggered a massive chain reaction in payroll and production cuts.

“The initial adjustment tends to be too big, then there’s some reversal of that,” says Ram Bhagavatula, managing director at the hedge fund, Combinatorics Capital.

That dynamic will lead to swifter and stronger recovery in both the economy and employment that many economists are forecasting.

All About The Economy

Economists cite several reasons for better labor market conditions this time. They expect job losses as well as the unemployment rate to peak close to the time growth bottoms out, as was the case in the 80s and 90s, and thus not resemble the jobless recoveries of the two most recent recessions.

“Once recovery starts, it won’t be long before the unemployment rate begins to decline,” says Mussa, who doesn’t see the jobless rate breaking 10 percent.

Though the recession of 2001 ended in November of that year, 12 months later the economy had added just 200,000 jobs. Moreover, the jobless rate kept rising through June of 2003.

By contrast, payroll losses bottomed out one month after the recession of 1982 ended in November. Payrolls were 3 million higher a year later.

No one is expecting such robust job growth this time, but economists say the relatively strong showing in productivity during this recession points to lean payrolls, which will have to be fattened up--in some cases, quickly--as the economy improves.

"When you have high peaks in jobless claims, you have sharp declines in claims," says Brusca.

More broadly, economists also point to a number of economic factors that bode well, despite lingering concerns about he credit crunch.

“Cyclical forces trump secular forces,” says Brusca, referring to the massive de-leveraging by both consumers and business. “This is especially true when authorities have stepped in to stabilize it,” after a shocking event like Lehman.

“We have massive monetary and fiscal stimulus in the pipeline,” says Macroeconomic Advisers President Chris Vavares.

—Reuters contributed to this story.

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