Forecast Article Looks At The Different Paths The U.S. Economic Recovery Could Take

Each month, Standard & Poor's Ratings Services publishes its economists' best estimate of where the U.S. economy could be heading. However, financial market participants also want to know how we think things could go worse--or better--than what our baseline scenario calls for. As a result, we have been publishing a quarterly feature called "Risks to the Forecast," in which we project two additional scenarios, one worse than the baseline and one better. Standard & Poor's published the latest version of this article, which is titled "U.S. Risks To The Forecast: Half Speed Or Full Speed?," earlier today.


According to the article, our baseline forecast assumes a gradual recovery after a few quarters of bouncing along the bottom, which looks like a stretched-out "U." But the risk of another downward leg on the recession remains real, producing a "W." The optimistic scenario is that we could again be underestimating the American consumer, and a stronger recovery could still turn into a more typical "V"-shaped expansion. However, the Japanese experience of the 1990s suggests that the risk of a fourth scenario, an "L"-shaped recession where years rather than months are spent bouncing along the bottom, should not be ignored.

It should be noted that our baseline scenario is far weaker than would be consistent with historical averages. On average, real GDP rises 5% in the first four quarters of a recovery and tends to rise even more sharply after deep recessions. Our baseline scenario shows a rise of only 2.3%, less than one-half the historical average, while our downside case shows an even weaker recovery of just 1.5%. Even our optimistic scenario implies an increase of only 4.7%. "We believe that the imbalances in the world and U.S. economies will keep the expansion slow," noted Standard & Poor's Senior Economist David Wyss. "The question is how slow."

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