Economic recovery takes V-shape

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Posted 9:54AM on Sunday, April 7, 2002

WASHINGTON - Experts expected the economic recovery to look like a lazy ``L.'' So far this year, though, the economy has soared, tracing the right side of a steep ``V.'' But with Middle East tensions causing energy prices to rise, analysts say a ``W'' - the dreaded double-dip recession - cannot be ruled out. So far, the economy has bounced back from the first recession in a decade with a powerful surge. ``We've had a very good start to the recovery, helped by all the stimulus provided by the government,'' said David Wyss, chief economist at Standard & Poor's in New York. The fuel added by Washington over the past year has included President Bush's $1.35 trillion, 10-year tax cut, the aggressive interest rate cuts by the Federal Reserve and billions of dollars in increased government spending after the Sept. 11 attacks. Some analysts believe that economic growth in the just-completed first quarter will show a sizzling 6 percent annual rate - a far cry from what they were forecasting as the year began. Just three months ago, the common view was that the recovery would start slowly, with the gross domestic product rising at around a 1 percent rate. That reflected the view that consumers - who normally drive the economy out of a downturn - would provide less momentum this time around because their spending had held up so well in 2001. So far this year, though, housing sales and auto sales have powered ahead, and there has been a sizable turnaround in business inventories, which were being cut by a record amount in the fourth quarter. Just halting this inventory decline is expected to account for about half of the improvement in first-quarter growth. A gain of 6 percent in the first quarter, following the 1.7 percent growth in the fourth quarter, would go a long way toward giving the rebound a V-shape rather than the forward-leaning L-shape that economists had expected. What will the rest of the year look like? No one expects the first-quarter growth rate to carry over, but most analysts expect GDP will rise at a healthy rate of 3 percent to 4 percent for the rest of the year. Economists believe growth in that range will keep unemployment stable. The jobless rate, which lags other economic indicators, rose to 5.7 percent in March, the government reported Friday. Many economists believe it will peak at 6 percent this summer before starting to decline. While that would be significantly higher than the 40-year low of 3.9 percent reached during the 1991-2001 expansion, it would be well below the jobless peaks set in previous downturns. The last recession, in 1990-91, pushed unemployment to a high of 7.8 percent. Many analysts expressed doubts that the Fed will let unemployment fall as low as it did in the last expansion unless productivity takes another large upward jump. With stronger growth in productivity - the amount of output per worker - unemployment can go lower without triggering inflationary wage pressures. ``We just don't think the Fed is going to be willing to test the lower boundaries of the jobless rate the way they did in the 1990s,'' said Chris Varvares of Macroeconomic Advisers in St. Louis. He predicted the jobless rate would be around 5.5 percent at the end of this year and perhaps as low as 5.1 percent by the end of 2003. But this improvement will depend on the economy continuing on an upward path and avoiding the feared W-shape, in which the economy expands for a while but then turns back down into a second recession. A second slump could be triggered by some jolt, such as another terrorist attack or a spike in oil prices ``The worst possible combination would be another terrorist attack combined with a disruption of oil supplies if the Middle East situation gets out of control,'' said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. Three recessions since the early 1970s have been associated with big increases in energy prices. At the moment, analysts say the possibility of a double-dip recession is a remote threat, with most indicators giving favorable signals that the recession that began in March 2001 has ended and growth prospects are brightening. ``We still have some clouds on the horizon, but the economy is a lot stronger than we would have expected just a couple of months ago,'' said Bill Cheney, chief economist at John Hancock in Boston.