Economist David Malpass sees the United States already in a “sharp” recession, but one that the equity markets have more than priced in.
President of economics research firm Encima Global, Malpass expects the recession to last only a short way into 2009. By traditional stock-market measures, a stock rally will precede the broader economic rebound.
“Key for equity markets is whether the recession is due to deep structural issues (and therefore long) or more due to government mistakes in responding to the financial crisis (and therefore relatively short if the latest fixes work to stabilize the financial system),” Malpass wrote in a note to clients.
“We think the recession is the result of incorrect steps in addressing the financial crisis rather than an inevitable outcome from housing, debt, and competitiveness issues,” Malpass wrote. “We expect positive growth to resume in 2009.”
Encima Global lowered its third quarter GDP forecast to negative 0.2 percent and its fourth quarter outlook to negative 3.6 percent, a contraction not seen since 1980 and 1982.
Economists Brian Wesbury and Robert Stein at First Trust Advisors are calling for a “V” shaped recovery.
They agree roughly with Malpass on his GDP forecast, but take it a step further, suggesting that the bust we’re in now will be followed by a quick boom.
Writing in Forbes, they say that the Fed’s arrival — better late than never — has unlocked credit markets, increasing the flow, or “velocity” of money in the economy.
“With velocity and the money supply both heading up, a "V" shaped recovery is likely,” they write.
Wesbury and Stein predict that the Dow will recover handily as well, hitting 11,000 by year-end and putting another 20 percent in 2009 to reach 13,250.
“The economy has succumbed to a panicky credit crisis, not a typical policy-induced recession,” they write. “As a result, the downturn is unlikely to last long.”
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