On the Recovery I'll Join Tim Duy on His Limb

     It's a pretty comfortable one, I think. I should say I'll have what Duy is having-or maybe he's had what I'm having, I don't know. However, his view on the economic recovery is very similar to how I've basically felt for a while.

      A lot of ink has been spilled over the past three years fretting about the fragility of the economy.  But the reality is largely the opposite.  The economy has proved to be very resilient.  We have weathered external demand shocks, external financial crises, and even fiscal contraction, and all the while economic activity continued to grind higher.  Looking back, it seems that the biggest risk the economy faced was the Fed's start/stop approach to quantitative easing.  That problem appears solved with open-ended QE linked to economic guideposts.

    At the risk of sounding overly optimistic, I am going to go out on a limb:  The recovery is here to stay.  Not "stay" as in "permanent."  I am not predicting the end of the business cycle.  But "stay" until some point after the Federal Reserve begins to raise interest rates, which I don't expect until 2015. This doesn't mean you need to be happy about the pace of growth.  But it does mean that a US recession in the next three years should be pretty far down on your list of concerns.  

     http://economistsview.typepad.com/timduy/2013/03/the-recovery-is-real.html

     He's right as well that there's a lot of bearishness out there. Indeed, most people I know are pretty bearish-including friends of mine like Nanute and Woj-I know your not Sumner Nanute. LOL! However, I don't think I'm wrong that your more bearish than me-not that this is hard! I don't know that you're super bearish but you aren't as sold on recovery as I am. I don't know that I would call Nanute real bearish, not super bearish anyway, just more bearish than me, but most people are. I'd say the median person today is bearish, certainly on the econ blogs. 

    I've discussed Woj's bearishness with him in the past too. He did emphasize though that he's not saying we're going to retest the lows now-though he thinks that we will at some point. Yet he sees this as coming in 2017 or so. Interestingly also sees the next recession as coming in around 2017:

     "The US economy is less fragile than commonly believed; it has endured a series of shocks over the last three years without major incident.   I am claiming neither that equity prices won't stumble, nor that we should be happy with the pace of activity.  But I do think that a recession is unlikely before the Federal Reserve begins raising interest rates - something not likely to happen for two years.  While long-run predictions are dangerous, for the sake of argument add up to another two years for tighter policy to reverberate through the economy and you are looking at sometime around 2016/2017 when the next recession hits.  That's the time frame I am currently thinking about."

      While they have the same timeline, Duy certainly doesn't see us as retesting the 2009 lows. I certainly don't either. Yet Duy's take is particularly optimistic. He seems to be saying that the next recession will be an old fashioned postwar one where the Fed deliberately causes it by raising interest rates. So this next recession will be in no sense a "double dip."

       While I'm pretty much on the opposite side of Woj in the bull-bear spectrum I wonder how Duy sees the economy performing the next 3-4 years. Are we going to get back to what we've come to expect as normal U.S growth? That is to say we're we grow about 3% per year with unemployment below 6%? Judging by the fact that he anticipates the Fed raising rates in 2015, maybe so as the Fed has pledged pretty much no tightening until 6.5% unemployment. On the one hand we've gone a long time with no recession-which is sobering as we are still so far from optimum. On the other hand we had so much ground to make up like in the 30s. I don't see us retracing the lows. To me the most likely worst case scenario is probably a 1937-38 style relapse. 

        I could see Duy being broadly right about the timetable. What worries me is if we get back to previous trends in output and employment or if we're at a newer "normal" with lower growth and higher unemployment, a la Tyler Cowen. \

       What's also interesting is this. Are we going to have a optimal recovery with traditional growth and employment levels while the EU remains so weak? If so we really are entering an age of bifurcation. Yet for now that seems very likely. There are very few "green shoots" in the EU. True, Draghii's strong words last Summer stemmed the tide of panic. However, the latest Cyprus debacle may be the thing that will spook the EU. 

       P.S. Let me just make the point that regarding Woj, he's a very smart guy and he knows a lot more about many things in Macro than I do, and you should read his blog. 

       http://bubblesandbusts.blogspot.com/

      Regarding the issue of predictions, reasonable people can disagree. Whether he's right or not an this he gives some very good economic analysis and I've certainly learnt a lot from reading him. 

       Of course, the guy I've learned the most from is: Nanute. And I'm not just saying this because he's taking me out to Popeye's this week.