Economy 3 ways

One part of the economic puzzle is easy enough to figure out: the recession is nearing an end (actually it might already be over, according to the government gauges). The tricky part is determining where we go from here. On that point, there is a consensus view and two distinct minority views - all of which is creating quite a bit of media noise. Certainly, everyone is getting restless; the economy has contracted for four consecutive quarters, which hasn't happened in at least 60-plus years. Yet it's worth noting that economies are very hard to decipher when they're about to reach bottom, and in a recession as deep and complex as this one, the signals are especially fuzzy. So here are the three basic forecasts:

--Consenus view: That the recession will formally end this summer, but that growth will be extremely sluggish well into 2010 and perhaps beyond. Unemployment will remain in the double-digit range for at least another year. Housing prices will see a modest upturn, but the market overall will be weak, especially in the areas hit hard by the subprime disaster. Here's how the Los Angeles Economic Development Corp. sums things up in a recent report:

There's no doubting it. The near-term outlook for the California economy is pretty bleak. The state will see a real recovery and economic expansion but not before 2011. Until then the challenge for everyone-- business firms, workers, all levels of government--will be to cope with the downturn and its ongoing consequences.

--Minority view #1: That the economy will rebound a lot better than generally believed. This argument holds that business owners and consumers were so panicked late last fall about the near-meltdown on Wall Street and fears of another depression that spending stopped in its tracks - even among those in relatively decent shape. Now that such concerns have been put to rest, the thinking goes, spending is likely to resume, perhaps as soon as this fall. Here's the view of Barclay Capital's Tim Bond, writing in the Financial Times:

The rally in the stock market, the low level of interest rates and the stabilisation in house prices all tend to limit the risk of a further sizeable increase in the savings rate. So over the rest of this year, the standard cyclical timing of a US economic turning point tells us pessimistic expectations are likely to collide with the economic reality of a strong recovery. The net result is almost inevitable, in the shape of an inexorable continuation of the equity rally.

--Minority view #2: The gloomiest prospect of all: That the economy will struggle to regain its footing, but then collapse on the weight of massive fiscal deficits and public debt accumulation. This could lead to increased inflation, soaring oil prices, weak profits, stagnant growth - and the possibility of another recession by late 2010 or 2011. This scenario, laid out at forbes.com by Dr. Gloom, economist Nouriel Roubini, centers on continued high unemployment and falling home prices. Keep in mind that most economists downplay or simply dismiss the chance of any "W" shaped recession - and even Roubini isn't saying it'll definitely happen. But there is an argument that the slow-growth-massive-deficit combination is bound to bite us at some point.

If oil prices rise too fast because of the wall of liquidity and long-term government bond yields keep rising (because large fiscal deficits keep on being monetized, leading to a rise in expected inflation after a long bout of deflation)--all against a background of weak demand and continued consumer distress--markets and the broader economy will slide hand-in-hand down the next steep slope of recession.