The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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July 24, 2009

A look at the recovery

Earlier this week my boss, Atlanta Fed President Dennis Lockhart, weighed in with his views about the shape of the economic recovery to come while speaking at a meeting of the Nashville, Tenn., Rotary Club:

"The economy is stabilizing and recovery will begin in the second half. The recovery will be weak compared with historic recoveries from recession. The recovery will be weak because the economy must make structural adjustments before the healthiest possible rate of growth can be achieved."

This quote was noted by Rebecca Wilder at News N Economics, along with similar sentiments from Nouriel Roubini and Mary Daly at the Federal Reserve Bank of San Francisco. You might add to the list Tim Duy's comments at Wall Street Pit and this assumption from Moody's Investor Services, reported at Seeking Alpha:

"Moody's predicts a 'hook-shaped' recovery path for banks, 'characterized by an upward tilt that lies somewhere in between a U- and an L-shaped economic recovery, implying a painful journey.' "

Says Dr. Wilder of the prospective recovery: "pathetic."

More colorful language than I would use, but if current forecasts come true, the early stages of the recovery will be as unusual as the recession itself.

How unusual? See for yourself:


The chart plots the four-quarter growth rate of gross domestic product (GDP) from the trough of a recession against the depth of the corresponding contraction, as measured by the cumulative loss of GDP over the course of the downturn. The points within the red circle represent all previous postwar recessions, and they form a nice, neat, easily discernible pattern. That is, the pace of growth in the first year after a recession has, in our history, been reliably related to how bad the recession was. The deeper the recession, the faster the recovery.

The points within the blue circle are based on forecasts of GDP growth from the third quarter of this year through the third quarter of 2010, obtained from the latest issue of Blue Chip Economic Indicators (which reports survey results from "America's leading business economists"). From top left of the circle to bottom right, the points represent the 10 lowest forecasts of the most optimistic members of the 50 Blue Chip forecasting panel, the panel's consensus (or average) forecast, and the 10 highest forecasts of the most pessimistic panel participants.

I chose the third quarter as the reference point because nearly two-thirds of the Blue Chip respondents indicate that, in their view, the recession will indeed end in the third quarter of this year. Assuming this occurs, this recovery would appear to be a big outlier. Either we are about to continue making history—and not in a good way—or current guesses about the medium-term economy are way too pessimistic.

On another note, if you would like to do a little prognosticating of your own, I commend to you our new weekly editions of Economic Highlights and Financial Highlights.

By David Altig, senior vice president and research director at the Atlanta Fed

July 24, 2009 in Business Cycles , Economic Growth and Development , Forecasts | Permalink


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I'd be interested to see the recovery estimates of Blue Chip respondents in prior recessions...do economists typically predict a weaker recovery than history suggests (4 qtr GDP growth of ~2-3x the peak-to-trough GDP decline)? I'm also curious about the dispersions of prior recovery estimates versus current.

Posted by: Bryan Lassiter | July 24, 2009 at 06:14 PM

How can you have historical context without 1900-1942 on the graph? I call BS on the whole presentation without including the only relevant period of history in the past century.

Posted by: Able | July 25, 2009 at 02:14 PM

I didn't see 1937 on the scattergram.

Posted by: Alan von Altendorf | July 25, 2009 at 08:10 PM

It's not a recession. We are about to make history, and "not in a good way."

Posted by: Gregor | July 26, 2009 at 11:40 AM

Is the Y axis also inflation adjusted?

Posted by: cubguy | July 26, 2009 at 10:35 PM

A very powerful chart. The statement "the deeper the recession, the faster the recovery" is also consistent with "reverting to the mean" tendency of the stock market.

Posted by: Business Cycle Investor | July 27, 2009 at 09:34 AM

Isn't part of this comparing conditional to unconditional expectations? If these economists assigned probability 1 to the recession ending in Q3 then their forecasts would represent expected post-recession growth and your chart would be fine. If not then they represent an unconditional expectation---mixing anticipated post-recession growth with the possibility of continued recession. Not that this disproves your point of course, but would be interesting to try and more carefully control for this.

Posted by: JGB | July 27, 2009 at 12:39 PM

I'm a semi-retired business economist and do not have the historic data, but the consensus always forecast a weak recovery.

In 1981 I won the NABE annual forecasting contest by forecasting that the recovery from the 1980 recession would be an average recovery. It was the strongest forecast in the contest.

Posted by: spencer | July 27, 2009 at 03:13 PM

Thank you for laying out the playing field in such a succinct manner. The current projections do not fit well with the post-war data base. They are more akin to the decade long glide path of the depression, and why not. Many of the same dynamics are in place including deflationary pressures, unbalanced world trade, a predatory financial industry, and declining personal incomes and the accompanying debt deflation. The impending retirement boom is overhanging in the face of poor fixed income prospects.

This time around, Keynes is leading the charge, supported by loose monetary policy. I think the chart needs at least one data point from the pre-war period.

Posted by: Dan | July 28, 2009 at 07:04 AM

At some point, I will have to stop being surprised by economists who think the current recession should resemble earlier recessions just because they are all called recessions.

Cripes. A recession is a name for a few broad symptoms. If you want to diagnose the disease, you need to look at all the symptoms and consider the patient's history.

If I encountered a doctor who gave the same diagnosis to all patients experiencing nausea and fever, I'd expect that the doctor would occasionally fail to catch a very severe condition. Likewise with economists who consider the recession label to be sufficient for diagnosis.

Posted by: ottnott | July 28, 2009 at 02:20 PM

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