Patterns of recovery: Economist Roubini on the shapes of things to come

by Melly Alazraki

After predicting our current global financial crisis, New York University professor of economics Nouriel Roubini earned himself the nickname Dr. Doom. Roubini's words have the power to move markets; when he talks, people listen.

And lately, Roubini seems to have changed his tune somewhat, albeit with many caveats. He anticipates a possible "U-shaped" recovery, with leading economies undeperforming for as many as three years, but also warns of the increased risk of a "double-dip" scenario. "U-shaped," "L-shaped," "double-dip," "V-shaped" -- what do these terms mean?

Economic activity is measured by several indicators that grow sustainably over time, during a normal economy. Economic growth is most often measured by gross domestic product, which grew an average of 3 percent annually during the last boom, between 2004 and 2006. Production, housing, and financial markets enjoyed robust activity; the labor market was healthy, as U.S. unemployment averaged 5 percent.

The souring economy was marked by declining activity. GDP fell as much as 6.4 percent at the height of the recession, in the first quarter this year. If the recession -- the longest since the Great Depression -- is indeed in recovery mode, one question is how the recovery will take shape.

The ideal is a "V-shaped" recovery, when an economic decline is followed by robust economic growth, when activity rises as sharply as it's declined. That's the least likely scenario now, unfortunately; the economy still needs to overcome a housing glut, subdued consumer spending, and the still-alarming pace of job losses.

The more likely scenario, which Roubini supports, is a "U-shaped" recovery, in which the economy takes much longer to regain its healthy growth. In this scenario, the recession stabilizes as the decline in economic activity slows. We've had a mixed bag of economic news lately; hopefully, we're starting to see the bottom of the U. The question is how long it would take the economy not only to stabilize -- slogging along the bottom curve of the U -- but to start growing again, and start climbing up the right arm of the U.

In a news conference, Roubini said he believes that once growth begins, it will "remain below trend ... especially for the advanced economies, for at least two or three years," Reuters reports. It depends on the exit strategy, he says -- and if we don't get it right, he warns, we might get a "double-dip" or "W-shaped" scenario.

Roubini warned of this scenario last week, in which the beginning of the recovery would be followed by a relapse. This outcome could arise from the wrong exit strategy. Roubini warns the Federal Reserve to watch out for asset prices. He also says that global recovery efforts will suffer if savings-prone economies don't start spending more, compensating for current slower spending by countries like the U.S. and Britain, both overspenders.

The worst-case scenario: the "L-shaped" recovery, with an economy remaining stagnant for an extended period, with no real catalysts to propel it to growth, as with Japan's long stagnation in the 90s. No economists view the L-shaped scenario as currently plausible. But from all that, Roubini, the Federal Reserve, the Organisation for Economic Co-operation and Development, the European Central Bank, and many other economists, officials and organizations are saying, it seems the global economy will most like find itself on a bumpy road. So let's add a shape -- and hope this road is going uphill.