Recent economic data continues to suggest that the U.S. is probably near the bottom of its recession or in the very early stages of resuming economic growth. At such junctures, there can be fluctuations between growth and contraction in some sectors of the economy. At the same time, some sectors can lag when it comes to a return to sustained growth.
In the near-term, aside from Q3 GDP, for which the growth figure will likely be distorted by the “cash for clunkers” program (final demand will be a better indicator), overall growth over the next 2-4 quarters will probably remain sluggish (real annualized rate of 2% or less for most of them and for the 2009 Q2-2010 Q2 timeframe as a whole).
A “U-shaped” scenario does not represent a “new normal” to use the lingo that has proliferated in the media. Instead, it reflects the historic experience following the collapse of asset bubbles that leave a substantial debt burden in their wake. During such times, those who accumulated the sizable debt burdens tend to deleverage. With respect to the housing bubble, it was U.S. households that accumulated a historically high debt burden. Now, households are continuing to deleverage. Today’s higher than expected contraction of consumer credit is just the latest confirmation of the deleveraging trend. Such deleveraging will tend to restrain growth in real personal consumption expenditures, which still comprises roughly 70% of GDP.
Looking ahead, the labor market will likely remain a significant drag through next year, even as the unemployment rate probably peaks early next year and then begins to slowly decline. In addition, there is a structural component to the unemployment rate. Not all jobs will return. Certain sectors will likely remain notably smaller than they were in the past following the recession.
The labor participation rate, which has fallen to 65.2% of the civilian noninstitutional population could reach or drop below 65%. To put this into perspective, during the 1990-99 timeframe, the labor participation rate averaged 66.7% of the civilian noninstitutional population. At the present rate (65.2%), the labor force is 3.55 million persons smaller than it would have been at the 1990-99 labor participation rate.
An inefficient employment services sector will likely undermatch and frequently fail to match qualified employees with employers who have openings. Such a phenomenon could further slow the recovery in the job market, lengthen the duration of unemployment, and possibly contribute to some unemployed workers leaving the labor force altogether.
All those developments will likely translate into elevated consumer and real estate loan delinquencies and charge-offs and reduced growth in real personal consumption expenditures. In turn, dozens of additional bank failures are likely in coming months. A brief burst of growth in corporate profits brought about due to higher productivity/lower wage expenses could slow markedly afterward until top-line revenue growth picks up. Inflation will remain abnormally low through the rest of this year into at least part of next year. In response, the Fed will maintain its present monetary policy stance through the rest of this year and probably into at least part of next year.
&&
Showing posts with label recovery. Show all posts
Showing posts with label recovery. Show all posts
Wednesday, October 7, 2009
Tuesday, August 25, 2009
IMF Research Director Outlines Challenges to Sustaining a Global Recovery
Recently, International Monetary Fund (IMF) Economic Counsellor and Director of Research Olivier Blanchard opined that a global economic recovery had commenced, but that sustaining it could require “delicate rebalancing” during which public fiscal stimulus spending is phased out and private demand replaces public demand, and during which large trade imbalances that had previously persisted moderate. In his assessment, Blanchard highlighted supply-side issues, demand-side issues, and risks associated with a failure to rebalance effectively.
A summary of those issues follows:
Supply-Side Issues:
• Partly dysfunctional financial systems in the advanced countries.
• Capital flows to developing countries that decreased may take a few years to fully recover.
• In nearly all countries, the costs of the crisis have exacerbated the fiscal burden and tax hikes may be necessary.
Demand-Side Issues:
• A return of economic growth in 2009 may not be sufficiently strong to reduce unemployment leading to a peak in the unemployment rate in 2010.
• Initial growth will depend mainly on inventory rebuilding and the fiscal stimulus, not private consumption and fixed investment spending. When the fiscal stimulus is unwound and inventory rebuilding is completed, rebalancing will be required to sustain economic growth.
Risks Associated With A Failure to Rebalance Effectively:
• An anemic U.S. recovery.
• Possible efforts to extend the fiscal stimulus. Premature phasing out of the stimulus would undermine economic growth. Extension of the stimulus could lead to concerns about U.S. debt, sparking large capital outflows from the U.S. and a potentially disorderly decline in the U.S. dollar. In turn, that additional instability or uncertainty concerning such instability could derail an economic recovery.
&&
A summary of those issues follows:
Supply-Side Issues:
• Partly dysfunctional financial systems in the advanced countries.
• Capital flows to developing countries that decreased may take a few years to fully recover.
• In nearly all countries, the costs of the crisis have exacerbated the fiscal burden and tax hikes may be necessary.
Demand-Side Issues:
• A return of economic growth in 2009 may not be sufficiently strong to reduce unemployment leading to a peak in the unemployment rate in 2010.
• Initial growth will depend mainly on inventory rebuilding and the fiscal stimulus, not private consumption and fixed investment spending. When the fiscal stimulus is unwound and inventory rebuilding is completed, rebalancing will be required to sustain economic growth.
Risks Associated With A Failure to Rebalance Effectively:
• An anemic U.S. recovery.
• Possible efforts to extend the fiscal stimulus. Premature phasing out of the stimulus would undermine economic growth. Extension of the stimulus could lead to concerns about U.S. debt, sparking large capital outflows from the U.S. and a potentially disorderly decline in the U.S. dollar. In turn, that additional instability or uncertainty concerning such instability could derail an economic recovery.
&&
Tuesday, August 4, 2009
High Household Debt Could Temper the Strength of the Economic Rebound
With the U.S. economy showing increasing signs of stabilizing and the rate of its contraction slowing markedly in the Second Quarter, the question arises as to how vigorous the rebound will be once it gets underway. A look at the 10 earlier post-World War II recessions offers a measure of insight.
In those earlier recessions, the mean change in real personal consumption expenditures and real GDP for the four quarters following the bottoming of real GDP came to 4.4% and 4.9% respectively. The median figures for real GDP were 4.6% and 5.4% respectively. During the last three recessions, both real personal consumption expenditures and real GDP rebounded notably more slowly.
One popular argument that is often heard is that, in general, the sharper the contraction, the stronger the recovery. A regression analysis of the previous post-World War II recessions suggests a very weak relationship. The coefficient of determination for such an outcome is just 0.180. The mean error using the extent of contraction as the independent variable came to 1.5 percentage points with respect to the actual growth of real GDP in the four quarters following the trough.
A broader set of data that used household debt as a percentage of nominal GDP at the beginning of the recession and growth in real personal consumption expenditures during the four quarters following the trough in real GDP as independent variables fared better. The coefficient of determination came to 0.671. In addition, the mean error was 0.9 percentage points.
Although the data set is small, what the data suggests offers some insight into looking ahead to the robustness of the economic recovery following the bottoming of the economy. In particular, the statistical analysis reveals:
• Higher household debt (as a share of nominal GDP) provides a headwind that impedes the vigor of the first four quarters of an economic recovery.
• The magnitude of the increase in real personal consumption expenditures is positively correlated with the magnitude of increase in real GDP.
In fact, on closer inspection, the data suggest that the magnitude of household debt is a potentially important determinant in how strongly real personal consumption expenditures recover. The coefficient of determination between household debt as a percentage of nominal GDP at the start of the recession and rate at which real personal consumption expenditures rise following the bottoming of the economy is 0.423. In other words, the rate at which real personal consumption expenditures increase following the trough of a recession is, in part, a function of household debt.
At the start of the current recession, household debt stood at a staggering 97.9% of GDP. 76.3% of that debt was tied up in mortgages. In contrast, during the 2001 recession, household debt came to 74.7% of GDP and 65.2% of that debt was comprised by mortgages. During the 2001 recession, home prices continued to rise. During the current recession, which was sparked by the collapse of a massive housing bubble, U.S. home prices have fallen 32.0%, as measured by the seasonally-adjusted Case-Shiller Index.
In the wake of the collapsed housing bubble, the household sector has been experiencing deleveraging. Household debt has fallen $158.8 billion. In addition, saving as a percentage of disposable income has risen sharply from a quarterly average of 1.5% of disposable income at the beginning of the recession to 5.2% of disposable income in the Second Quarter.
In sum, the household debt burden is another indication that the upcoming economic recovery will likely be shallower than has been the norm during the post-World War II experience. Given the magnitude of household debt, economic growth in the real GDP of 1.5% to 2.5% over the four quarters following the bottom of the recession is probably more likely than the post-World War II median figure of 5.4%.
&&
In those earlier recessions, the mean change in real personal consumption expenditures and real GDP for the four quarters following the bottoming of real GDP came to 4.4% and 4.9% respectively. The median figures for real GDP were 4.6% and 5.4% respectively. During the last three recessions, both real personal consumption expenditures and real GDP rebounded notably more slowly.
One popular argument that is often heard is that, in general, the sharper the contraction, the stronger the recovery. A regression analysis of the previous post-World War II recessions suggests a very weak relationship. The coefficient of determination for such an outcome is just 0.180. The mean error using the extent of contraction as the independent variable came to 1.5 percentage points with respect to the actual growth of real GDP in the four quarters following the trough.
A broader set of data that used household debt as a percentage of nominal GDP at the beginning of the recession and growth in real personal consumption expenditures during the four quarters following the trough in real GDP as independent variables fared better. The coefficient of determination came to 0.671. In addition, the mean error was 0.9 percentage points.
Although the data set is small, what the data suggests offers some insight into looking ahead to the robustness of the economic recovery following the bottoming of the economy. In particular, the statistical analysis reveals:
• Higher household debt (as a share of nominal GDP) provides a headwind that impedes the vigor of the first four quarters of an economic recovery.
• The magnitude of the increase in real personal consumption expenditures is positively correlated with the magnitude of increase in real GDP.
In fact, on closer inspection, the data suggest that the magnitude of household debt is a potentially important determinant in how strongly real personal consumption expenditures recover. The coefficient of determination between household debt as a percentage of nominal GDP at the start of the recession and rate at which real personal consumption expenditures rise following the bottoming of the economy is 0.423. In other words, the rate at which real personal consumption expenditures increase following the trough of a recession is, in part, a function of household debt.
At the start of the current recession, household debt stood at a staggering 97.9% of GDP. 76.3% of that debt was tied up in mortgages. In contrast, during the 2001 recession, household debt came to 74.7% of GDP and 65.2% of that debt was comprised by mortgages. During the 2001 recession, home prices continued to rise. During the current recession, which was sparked by the collapse of a massive housing bubble, U.S. home prices have fallen 32.0%, as measured by the seasonally-adjusted Case-Shiller Index.
In the wake of the collapsed housing bubble, the household sector has been experiencing deleveraging. Household debt has fallen $158.8 billion. In addition, saving as a percentage of disposable income has risen sharply from a quarterly average of 1.5% of disposable income at the beginning of the recession to 5.2% of disposable income in the Second Quarter.
In sum, the household debt burden is another indication that the upcoming economic recovery will likely be shallower than has been the norm during the post-World War II experience. Given the magnitude of household debt, economic growth in the real GDP of 1.5% to 2.5% over the four quarters following the bottom of the recession is probably more likely than the post-World War II median figure of 5.4%.
&&
Wednesday, July 29, 2009
Latest Data Indicates Housing Prices May Be Stabilizing
For the first time since July 2006, the S&P/Case-Shiller Home Price Index for 20 cities registered an increase. The data for May 2009 showed that home prices rose 0.5%. However, on a seasonally-adjusted basis, home prices continued there slide, albeit a slowing descent. The seasonally-adjusted 20-city index fell 0.2%.
The latest data may be signaling a stabilization of home prices over coming months. For March 2009, just 1 of the 20 cities saw home prices increase. In April, 4 cities experienced price gains. In May, 8 cities registered price gains. In Cleveland and Dallas, home prices rose more than 1%. Cleveland, Dallas, Denver, and Washington, DC have now experienced a rise in home prices for two consecutive months. In Denver, home prices have risen for three consecutive months.
However, some cities continued to experience precipitous declines in home prices. Las Vegas, Miami, and Phoenix all saw home prices fall more than 1%.
bor
In a potentially discouraging note for some of the hardest-hit housing markets, four of the five cities that registered the biggest price declines in May were among those that had seen peak-to-trough declines in excess of 40%. Those cities, along with their home price declines to date, are:
Las Vegas: 53.3%
Los Angeles: 41.4%
Miami: 48.3%
Phoenix: 54.3%
Among the cities benefiting from the biggest monthly home appreciation, just one (San Francisco) had seen a 40% or greater drop in home prices.
That data hints that where the asset bubble was most pronounced, not where home prices have fallen most, could see the slowest recovery in home prices. Instead, a recovery in home prices could commence soonest in regions in which the economy is most resilient and the housing bubble was less pronounced.
In the months ahead, four factors will probably play an important role in shaping any housing recovery that commences:
• Changes in long-term interest rates. The nation’s short-term fiscal situation, namely its ability to continue to finance its enormous stimulus efforts, and changes to its long-term fiscal trajectory could impact long-term rates.
• Rising unemployment. Rising unemployment could dampen consumer confidence and increase risk-aversion toward major purchases, including homes. It could also strain the finances of families with mortgages, leading to increased foreclosures and increased inventory.
• Financial system fragility that inhibits home lending, particularly if the commercial real estate sector experiences a sharpening descent. Already, 15 of the 64 bank failures this year have occurred in states in which cities saw the biggest home price declines in May. Hence, a self-reinforcing relationship between home price trends and bank failures is a possibility.
• Whether an economic recovery takes root or fizzles.
In the near-term, even as home prices are showing signs of stabilization, further declines are still likely. The epicenter of price declines will likely remain California, Arizona, Nevada, and Florida. A recent worsening of the housing situation in the Pacific Northwest may indicate continuing softness there. Afterward, even when the 20-city index bottoms out and begins to rise, regional differences in home price trends could persist for some time.
&&
The latest data may be signaling a stabilization of home prices over coming months. For March 2009, just 1 of the 20 cities saw home prices increase. In April, 4 cities experienced price gains. In May, 8 cities registered price gains. In Cleveland and Dallas, home prices rose more than 1%. Cleveland, Dallas, Denver, and Washington, DC have now experienced a rise in home prices for two consecutive months. In Denver, home prices have risen for three consecutive months.
However, some cities continued to experience precipitous declines in home prices. Las Vegas, Miami, and Phoenix all saw home prices fall more than 1%.
borIn a potentially discouraging note for some of the hardest-hit housing markets, four of the five cities that registered the biggest price declines in May were among those that had seen peak-to-trough declines in excess of 40%. Those cities, along with their home price declines to date, are:
Las Vegas: 53.3%
Los Angeles: 41.4%
Miami: 48.3%
Phoenix: 54.3%
Among the cities benefiting from the biggest monthly home appreciation, just one (San Francisco) had seen a 40% or greater drop in home prices.
That data hints that where the asset bubble was most pronounced, not where home prices have fallen most, could see the slowest recovery in home prices. Instead, a recovery in home prices could commence soonest in regions in which the economy is most resilient and the housing bubble was less pronounced.
In the months ahead, four factors will probably play an important role in shaping any housing recovery that commences:
• Changes in long-term interest rates. The nation’s short-term fiscal situation, namely its ability to continue to finance its enormous stimulus efforts, and changes to its long-term fiscal trajectory could impact long-term rates.
• Rising unemployment. Rising unemployment could dampen consumer confidence and increase risk-aversion toward major purchases, including homes. It could also strain the finances of families with mortgages, leading to increased foreclosures and increased inventory.
• Financial system fragility that inhibits home lending, particularly if the commercial real estate sector experiences a sharpening descent. Already, 15 of the 64 bank failures this year have occurred in states in which cities saw the biggest home price declines in May. Hence, a self-reinforcing relationship between home price trends and bank failures is a possibility.
• Whether an economic recovery takes root or fizzles.
In the near-term, even as home prices are showing signs of stabilization, further declines are still likely. The epicenter of price declines will likely remain California, Arizona, Nevada, and Florida. A recent worsening of the housing situation in the Pacific Northwest may indicate continuing softness there. Afterward, even when the 20-city index bottoms out and begins to rise, regional differences in home price trends could persist for some time.
&&
Friday, July 10, 2009
Is the U.S. in the Midst of a “Lost Decade” for Stocks?
Typically, U.S. stocks bottom out 3-6 months before the end of a recession and they return to their pre-recession highs, on average, about 3.7 years after having reached that high. The experience following U.S. recessions since 1950 is as follows:
• July 1953-May 1954 recession: Pre-recession peak: 293.79, January 5, 1953; First close at or above that level: 294.03, February 4, 1954; Interval: 1 year, 30 days (395 days).
• August 1957-April 1958 recession: Pre-recession peak: 521.05, April 6, 1956; First close at or above that level: 523.40, September 15, 1958; Interval: 2 years, 5 months, 9 days (892 days).
• April 1960-February 1961 recession: Pre-recession peak: 685.47, January 5, 1960; First close at or above that level: 692.06, April 10, 1961; Interval: 1 year, 3 months, 5 days (461 days).
• December 1969-January 1970 recession: Pre-recession peak: 985.21, December 3, 1968; First close at or above that level: 988.26, November 9, 1972; Interval: 3 years, 11 months, 6 days (1,437 days).
• November 1973-March 1975 recession: Pre-recession peak: 1,051.70, January 11, 1973; First close at or above that level: 1,065.49, November 3, 1982; Interval: 9 years, 9 months, 23 days (3,583 days); Two oil price shocks, an extended period of high inflation, and two recessions (January-July 1980 and July 1981-November 1982) occurred during that nearly 10-year interval.
• July 1990-November 1991 recession: Pre-recession peak: 2,999.75, July 17, 1990; First close at or above that level: 3,004.46, April 17, 1991; Interval: 9 months (274 days).
• March 2001-November 2001 recession: Pre-recession peak: 11,722.98, January 14, 2000; First close at or above that level: 11,727.34, October 3, 2006; Interval: 6 years, 8 months, 19 days (2,454 days); The dot-com bubble burst, the federal government saw budget surpluses that emerged during the late 1990s give way to renewed significant budget deficits, and the September 11, 2001 terrorist attacks occurred during that nearly 7-year interval.
However, in the earlier experience, there have been two occasions during which the Dow Jones Industrials failed to reach its pre-recession peak for 10 years or longer. Those seminal economic events were the Panic of 1907 that produced a credit crunch and severe recession in which real GDP fell 10.8% and the Great Depression during which real GDP contracted by 26.5% in the 1929-33 timeframe. In addition, following the collapse of Japan’s twin stock market and real estate bubbles, its Nikkei 225 Index has remained much below its December 1989 top for more than 19 years.
The Panic of 1907: The Dow Jones Industrials closed at 103.00 on January 19, 1906. The Dow Jones Industrials did not return to that level until it closed at 103.11 on September 28, 1916, an interval of 10 years, 8 months, and 9 days (3,905 days).
The Great Depression: The Dow Jones Industrials closed at 381.17 on September 3, 1929. The Dow Jones Industrials did not return to that level until it closed at 382.74 on November 23, 1954, an interval of 25 years, 2 months, and 2 days (9,212 days).
Japan’s “Lost Decade” of the 1990s-2000s: The Nikkei 225 Index closed at 38,915.87 on December 29, 1989. Through July 10, 2009, the Nikkei has failed to return to that level. That is an interval of 19 years, 6 months, and 11 days (7,133 days). Its last closing price was 9,287.28 on July 10, a figure that is 76% below its December 1989 crest.
In terms of the ongoing “Great Recession” in the United States, the Dow Jones Industrials peaked at 14,164.53 on October 9, 2007. On July 9, the Dow Jones Industrials closed at 8,183.17, which is 42% below its pre-recession peak.
Four possible scenarios could result in the Dow Jones Industrials taking a decade or longer to return to its pre-recession peak:
• In the absence of visible signs of economic recovery, federal policy failures, and a generally unrelenting bear market that turns aside repeated rally attempts, investors could make fundamental changes in their perceptions of risk concerning equities. That development would lead to a long-term reduction in demand for stocks.
• The economic recovery from the current severe recession would be fairly brief. Perhaps, a double-dip recession scenario would unfold. At the same time, on account of a fragile financial system that takes time to heal and increased leverage that needs to be worked off by households, recessions could grow more frequent in succeeding years. During the pre-World War II era (1857 through 1945), the median duration of economic expansions was 22 months and the mean length was 29 months. During the post-World War II period, those figures more than doubled to 45 and 58 months respectively. There is no assurance that the post-World War II experience of notably longer business expansions will persist.
• The U.S. could still experience a systemic financial crisis that severely damages its financial institutions, the development and onset of deflation from a premature withdrawal of fiscal and monetary stimulus, or a currency crisis should it encounter difficulty raising funds to support its economic stimulus efforts and underwrite possible new programs.
• A major geopolitical shock or shocks that have a substantial adverse impact on the U.S. and international economies. Such shocks could include, but would not be limited to the outbreak of conflict in a geopolitically crucial part of the world, the collapse of a government and radical changes in policy in a nation whose economy is intensely interconnected with the world’s major economies, a catastrophic natural disaster that devastates a globally-important financial center.
Conclusion:
Given the past experience following the severe 1973-75 recession, the collapse of the dot-com bubble, there is a reasonably likely prospect that the Dow Jones Industrials may not return to its pre-recession high of 14,164.53 until late in 2014 or beyond. The effectiveness of ongoing political efforts to shore up the nation's banking system and revive the economy and whether or not there are additional significant economic and geopolitical shocks will be critical in influencing the timing of a stock market recovery. Should those efforts fail to produce the desired impact, or worse, should they result in consequences that adversely impact or disrupt the nation’s growth trajectory, there is a genuine possibility that the Dow might not return to that level for a decade or longer after its October 9, 2007 record close.
&&
• July 1953-May 1954 recession: Pre-recession peak: 293.79, January 5, 1953; First close at or above that level: 294.03, February 4, 1954; Interval: 1 year, 30 days (395 days).
• August 1957-April 1958 recession: Pre-recession peak: 521.05, April 6, 1956; First close at or above that level: 523.40, September 15, 1958; Interval: 2 years, 5 months, 9 days (892 days).
• April 1960-February 1961 recession: Pre-recession peak: 685.47, January 5, 1960; First close at or above that level: 692.06, April 10, 1961; Interval: 1 year, 3 months, 5 days (461 days).
• December 1969-January 1970 recession: Pre-recession peak: 985.21, December 3, 1968; First close at or above that level: 988.26, November 9, 1972; Interval: 3 years, 11 months, 6 days (1,437 days).
• November 1973-March 1975 recession: Pre-recession peak: 1,051.70, January 11, 1973; First close at or above that level: 1,065.49, November 3, 1982; Interval: 9 years, 9 months, 23 days (3,583 days); Two oil price shocks, an extended period of high inflation, and two recessions (January-July 1980 and July 1981-November 1982) occurred during that nearly 10-year interval.
• July 1990-November 1991 recession: Pre-recession peak: 2,999.75, July 17, 1990; First close at or above that level: 3,004.46, April 17, 1991; Interval: 9 months (274 days).
• March 2001-November 2001 recession: Pre-recession peak: 11,722.98, January 14, 2000; First close at or above that level: 11,727.34, October 3, 2006; Interval: 6 years, 8 months, 19 days (2,454 days); The dot-com bubble burst, the federal government saw budget surpluses that emerged during the late 1990s give way to renewed significant budget deficits, and the September 11, 2001 terrorist attacks occurred during that nearly 7-year interval.
However, in the earlier experience, there have been two occasions during which the Dow Jones Industrials failed to reach its pre-recession peak for 10 years or longer. Those seminal economic events were the Panic of 1907 that produced a credit crunch and severe recession in which real GDP fell 10.8% and the Great Depression during which real GDP contracted by 26.5% in the 1929-33 timeframe. In addition, following the collapse of Japan’s twin stock market and real estate bubbles, its Nikkei 225 Index has remained much below its December 1989 top for more than 19 years.
The Panic of 1907: The Dow Jones Industrials closed at 103.00 on January 19, 1906. The Dow Jones Industrials did not return to that level until it closed at 103.11 on September 28, 1916, an interval of 10 years, 8 months, and 9 days (3,905 days).
The Great Depression: The Dow Jones Industrials closed at 381.17 on September 3, 1929. The Dow Jones Industrials did not return to that level until it closed at 382.74 on November 23, 1954, an interval of 25 years, 2 months, and 2 days (9,212 days).
Japan’s “Lost Decade” of the 1990s-2000s: The Nikkei 225 Index closed at 38,915.87 on December 29, 1989. Through July 10, 2009, the Nikkei has failed to return to that level. That is an interval of 19 years, 6 months, and 11 days (7,133 days). Its last closing price was 9,287.28 on July 10, a figure that is 76% below its December 1989 crest.
In terms of the ongoing “Great Recession” in the United States, the Dow Jones Industrials peaked at 14,164.53 on October 9, 2007. On July 9, the Dow Jones Industrials closed at 8,183.17, which is 42% below its pre-recession peak.
Four possible scenarios could result in the Dow Jones Industrials taking a decade or longer to return to its pre-recession peak:
• In the absence of visible signs of economic recovery, federal policy failures, and a generally unrelenting bear market that turns aside repeated rally attempts, investors could make fundamental changes in their perceptions of risk concerning equities. That development would lead to a long-term reduction in demand for stocks.
• The economic recovery from the current severe recession would be fairly brief. Perhaps, a double-dip recession scenario would unfold. At the same time, on account of a fragile financial system that takes time to heal and increased leverage that needs to be worked off by households, recessions could grow more frequent in succeeding years. During the pre-World War II era (1857 through 1945), the median duration of economic expansions was 22 months and the mean length was 29 months. During the post-World War II period, those figures more than doubled to 45 and 58 months respectively. There is no assurance that the post-World War II experience of notably longer business expansions will persist.
• The U.S. could still experience a systemic financial crisis that severely damages its financial institutions, the development and onset of deflation from a premature withdrawal of fiscal and monetary stimulus, or a currency crisis should it encounter difficulty raising funds to support its economic stimulus efforts and underwrite possible new programs.
• A major geopolitical shock or shocks that have a substantial adverse impact on the U.S. and international economies. Such shocks could include, but would not be limited to the outbreak of conflict in a geopolitically crucial part of the world, the collapse of a government and radical changes in policy in a nation whose economy is intensely interconnected with the world’s major economies, a catastrophic natural disaster that devastates a globally-important financial center.
Conclusion:
Given the past experience following the severe 1973-75 recession, the collapse of the dot-com bubble, there is a reasonably likely prospect that the Dow Jones Industrials may not return to its pre-recession high of 14,164.53 until late in 2014 or beyond. The effectiveness of ongoing political efforts to shore up the nation's banking system and revive the economy and whether or not there are additional significant economic and geopolitical shocks will be critical in influencing the timing of a stock market recovery. Should those efforts fail to produce the desired impact, or worse, should they result in consequences that adversely impact or disrupt the nation’s growth trajectory, there is a genuine possibility that the Dow might not return to that level for a decade or longer after its October 9, 2007 record close.
&&
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