At last, some relief

Yeah, the Dow is still down more than 5,000 points from its high and the credit crisis, though improved, is far from contained. But at least we're not seeing WSJ.com bulletins every five minutes - and at least traders are back to discussing normal stuff like earnings results (which, by the way, have been mixed). Frankly, it's a relief having pundits debate how long and severe the recession is likely to be. We know about recessions - they come, they go. Cataclysmic financial meltdowns are another matter. Sticking to this glass half-full point of view, long-time Barron's economics writer Gene Epstein has a cover story in this week's issue in which he challenges the disaster scenario laid out by gloomy Guses like Nouriel Roubini. Equal time and all that.

The economy has often proved more resilient than is commonly thought -- and constructive factors that have gotten scant attention should help the U.S. skirt a deep recession. In fact, it's possible that the downturn could prove to be one of the briefest and mildest on record. The main positive is the huge boost to consumer spending that will come from the decline in energy costs. Although the run-up in oil, which punished consumers in the spring and summer, made front-page news, far less attention has been paid to the benefits of petroleum's recent slide.

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What's the most likely scenario? We're now in the roughest patch. Real -- that is, inflation-adjusted -- gross domestic product probably grew at an annual rate of 0% to 1% in the three months ended Sept. 30 and will do no better in the current quarter. Growth should then accelerate, to an annualized pace exceeding 1% by 2009's first quarter and 2% by the second. By the third and fourth quarters, something resembling a recovery will have begun, with annual GDP growth topping 3%. However, the unemployment rate will continue to rise through mid-2009. This reflects the reality that, since mid-2007, real GDP hasn't risen fast enough to prevent joblessness from climbing and won't until the end of 2009.

And by next year, in addition to the freer flow of credit, other reinforcements should begin to arrive. The expansion phase of this business cycle produced relatively modest increases in capital investment. Thus, there's no capital overhang to work off. Manufacturing capacity, in high-tech and other industries, grew at a subdued rate. Sometime in 2009, then, capital investment could start contributing to growth. Early in 2009, inventory rebuilding could resume, to remedy the inventory liquidation that started late last year and that has pushed inventory-to-sales ratios unusually low. The only inventory overhang currently is in vehicles, and is partly attributable to a scarcity of auto loans. But as the credit crunch eases, auto sales probably will pick up. If gasoline prices don't rise, consumers may be more willing to buy the now-unwanted cars that are less than fuel-efficient.