It may take awhile for forecasters to acquiesce to signs of a strong recovery

After a flurry of headlines announcing that the "consumer is back" and the economy is poised for a strong recovery (here , for example) I had thought the consensus was going to form quickly behind a "V" shaped recovery. Not so fast. Here's Greg Ip:

Curb your enthusiasm. Yes, the economy is recovering, as everyone save the nihilists expected. However, the debate ought to be about the strength, not the fact, of the recovery. At the risk of gross oversimplification, the debate is this: do we follow the strong recovery model (the “V”) which holds that deep recessions are followed by strong recoveries, or the weak recovery model (the “U”) that holds that recessions caused by financial crises are followed by weak recoveries? I have long been in the latter camp. In fact, I describe my forecast as “reverse square root”, sort of a cross between a V and U (credit to George Soros for the term): an early cyclical rebound followed by muted growth. I’m still there.

Talk about moving the goal posts! For year's we've been debating whether we were going to have a V or a U (occasionally you'd hear about a W or L too) - now we're concerned about a "reverse square root"? Criminy, the pessimism dies hard.

Ip's reasoning, usually solid, is pretty weak here.

Now, to the evidence. So far, the magnitude of growth does not validate the V. GDP fell more during the 2007-2009 recession than in either 1973-75 or 1981-82 and has recovered less. Assuming GDP grew 3% (annualised) in the first quarter, which is the consensus, then it will be up 2.8% (not annualised) in the nine months since the recession ended, compared to 3.8% after 1975 and 5.6% after 1982. Yes, employment is finally rising, but as The Economist notes, its performance is far worse than after other recessions.

Ip's argument is essentially, pessimism is justified because so many commentators are pessimistic. Of course the problem with "the consensus" is that it has been too pessimistic in recent quarters. GDP is more likely to grow at 5% this quarter than 3%.

Second, the composition of growth looks unsustainable. A disproportionate amount so far has come from inventories which are not a sustainable source of demand. Relative to expectations, final demand is a wash: consumption has been stronger but housing has been weaker.

Err, um, Mr. Ip - Consumption is 70% of GDP, housing is 3%. It's not a wash.

But after a financial crisis a traumatised financial system stops the benefits of easy monetary policy from reaching households. Banks have tightened their underwriting standards, and even if they hadn’t, many households wouldn’t qualify with their homes worth less than their mortgages.

We've heard a lot of loose talk about what happens after financial crises, but I don't think that there are enough close historic parallels to what's going on now to make any definitive judgments. Reinhart and Rogoff dig up some interesting data on financial crises around the globe, but it's not at all clear that these past episodes shed a ton of light on the prospects of growth in this particular case.

So, just as in 2008 it took forecasters and businesses awhile to capitulate to the fact that the economy was headed into a severe recession, it looks like it'll take another quarter or two of strong growth to convince them that we're really coming out.