Journal Is Wide-Eyed on a Potential Rebound

The Journal is too contrarian for the sake of it in an Outlook column positing that the economy could be in for a sharp recovery.

The chance of any rebound in the current quarter seems far-fetched after last week’s dismal reports on January manufacturing activity, chain-store sales and jobs. Still, if the government’s coming stimulus package and bank plan are able to restore a modicum of confidence in the economy, recovery could come surprisingly quickly.

Yeah, yeah. Everybody’s down on the economy nowadays, and it’s good to break from the herd sometimes. But comparing this recession to the one in 1980 just doesn’t make much sense.

For one thing that one was extremely short, in an inflationary environment, and due to the Fed sharply tightening interest rates to cripple that inflation.

This one’s already gone on longer than the 1980 downturn, and we’re pretty much in a deflationary environment now. Prices of assets are falling, and if you see that ending soon, you must be a Wall Street analyst.

What shall we add to the list? Oh, the massive overleveraging of the economy extended to consumers, of course, who’ve shut down spending. I come down on the side of those who think we won’t see consumer spending hit 2007-type levels for a long, long time. That was mostly debt-driven anyway (except for the Gilded Age excesses on Wall Street and in Greenwich), and it’s going to be much harder from now on—even with a recovery to get credit like that.

Which is a point the WSJ actually makes… in the last paragraph. Here are the last three graphs of the story, which sort of say “well, nevermind” to its whole thesis.

But recovery would need to be treated with caution. Recent research from economists Carmen Reinhart at the University of Maryland and Kenneth Rogoff at Harvard finds that in the aftermath of a banking crisis, a country’s economy, on average, contracts by 9% over a period of two years, while its unemployment rate climbs by seven percentage points over four years. It’s a drawn-out process often punctuated by false starts.

“You’re still deep in the hole and there’s this reprieve that makes it look as if things are getting better, and they roll over and die again,” Ms. Reinhart said.

Here’s the sobering lesson: The economic expansion that followed the 1980 recession was one of the briefest on record. Rampant inflation and overdependence on a manufacturing sector facing stiff foreign competition were still problems, and by mid-1981 the economy was careening into the longest downturn since the Great Depression. After years of heavy dependence on credit-fueled spending, a quick recovery for today’s economy could also prove fleeting.

Read those last three graphs and forget about the top.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.