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Have we hit bottom? Big deal Add to ...

Maybe the worst of the stock market decline is behind us - but Tim Duy is more concerned about what happens next. Expecting a surge back to near-record high levels, with strong economic growth and low unemployment? That might be expecting too much.

Mr. Duy, who writes Tim Duy's Fed Watch, agrees that eventually things will get less worse for the U.S. economy, early next year at the latest if recent signs of a turnaround prove to be wrong.

"That should not, however, be confused with an optimistic outlook, as the durability and strength of the eventual recovery is in doubt," he said. "I am confident that the economy will not spiral downward endlessly; I am more worried that the we willbe left at a suboptimal equilibriumchiefly characterized by lowgrowth and persistently high unemployment."

In other words, the hoped-for V-shaped recovery might in fact look more like an L-shaped recovery, which would certainly make stock markets volatile for some time. He quoted Janet Yellen, president of the Federal Reserve Bank of San Francisco, who is optimistic that the U.S. economy will pull out of its negative feedback loop. Still, she noted that "with economic activity weakening, economic slack is likely to be substantial for several more years."

Mr. Duy argued that the aftereffects of the credit bubble will linger for some time, crimping growth. As well, the global nature of the economic downturn, exacerbated by the fact that few economies are willing to provide the sort of drastic stimulus now being delivered in the United States, won't help U.S. exports.

"Expectations ofa rapid return to sustainable,high growth path are likely to be met with disappointment," he said."Hitting the bottom is inevitable. It is the subsequent pace of growth that should be the focus of concern."

 

 

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