Economists Say Demand Will Drive V-Shaped Recovery

New York, NY, Aug. 14, 2009--Pent up demand could lead to a V-shaped recovery, three economists say.

The worst recession since the 1930s has created demand in many areas that will grow the economy, say James Glassman at JPMorgan Chase & Co., former Federal Reserve Governor Laurence Meyer and Stephen Stanley at RBS Securities Inc.

“Whenever we have plunged off a cliff and fallen into a deep hole in the past, for a while the economy has a tendency to bounce back very quickly,” said Glassman, a senior economist at JPMorgan in New York.

Glassman and his colleagues said forecasts of 3 percent to 4 percent growth in coming quarters may be too low given “pent-up” consumer demand.

JPMorgan’s outlook contradicts the "New Normal" view popularized by Mohamed El-Erian, CEO at Pacific Investment Management Co., that high unemployment and lower asset values will keep growth at 2 percent or less for years.

El-Erian  said “the indicators we follow continue to point to sluggish medium-term growth in the U.S.”

The New Normal theory predicts that the recession will leave unemployment higher for years. Glassman and Meyer dispute that.

“The thing I object to most about the New Normal idea is that we are stuck and have to accept higher unemployment --if you look at the Fed, they are doing everything they can to fight it,” said Glassman, who formerly worked as a Fed economist in Washington.

Meyer, vice chairman of St. Louis-based Macroeconomic Advisers LLC, expects GDP to jump by 3.6 percent in 2010 and 3.9 percent in 2011. Annual growth surpassed 3 percent only once so far this decade, in 2004, and has averaged just 2.2 percent.

“The big driver of that is home prices,” said Meyer, referring to his recovery forecast. “If home prices stabilize, that is a tremendous boost to housing that dominates every other variable in our equation. There is a lot of pent-up demand in that particular area.”