Recessions spawn gloom. Deep recessions create so much gloom that good news – like Friday's much-better-than-expected jobs report – comes as a jolt.
It shouldn't, says Lakshman Achuthan, of Economic Cycle Research Institute, who makes his living predicting the ups and downs of the economy. It does only because of the "giant error of pessimism."
The pessimism works this way: Last month, 247,000 Americans lost their jobs, the Department of Labor reported Friday. In a run-of-the-mill recession, that would be a disaster, points out economist Paul Ashworth of Capital Economics.
But in the context of this grinding recession, it represents an improvement. July's job losses were the smallest since August 2008. Most analysts were expecting July's job losses to be far higher.
The unemployment rate also improved – declining from 9.5 percent in June to 9.4 percent in July – but for all the wrong reasons. The labor pool shrank as more Americans gave up actively looking for work and thus were no longer counted.
Such gloomier-than-necessary attitudes – among analysts and discouraged workers alike – have been part of every US economic crisis in the past century, Mr. Achuthan says in a telephone interview. "There's kind of a belief that before we can recover we must fix all of these bad things that were going on. [But] the business-cycle recovery does not require that every one of our past misdeeds or bad decisions be corrected."
Already, his weekly leading indicators are surging into double-digit growth – the first time that's happened since 2004, he says. Unlike many analysts who see a U-shaped recovery, where the economy continues to scrape along the bottom for months to come and then turns up, he says the most likely scenario is a more immediate upturn that looks like a v.
It won't be a big V, like the strong recoveries of 30 or 40 years ago, he adds. Today's problems – such as too much debt and falling housing prices – will be a drag on growth. But a small v is much better than a U or the double-dip recession that some analysts are forecasting.
When a boom ends and optimism gives way to pessimism, "that error of pessimism isn't born an infant, it's born a giant," Achuthan says. Then, "when a recession ends and a recovery begins, it's going to feel in your gut certainly very bad, because you are near the worst part of the business cycle. You're at the low."
If he's right, the coming turnaround will prove stronger than most Americans are expecting.
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