Historically we often think of a recession as a sharp drop in economic output followed by a sharp rise. This is called the “V-shaped” recovery. The current “Great Recession” had a sharp downturn but so far no recovery after 18 months, and most talk is of an “L-shaped” or “U-shaped” rebound.

Why is this?

There’s an excellent post on Calculated Risk blog (one of my favorites) about economic growth engines that typically pull us out of recession with a sharp upward swing in activity.

The top two economic growth engines are residential investment and personal consumption expenditures.

Since we’ve had the largest residential real estate bubble in history and massive over-consumption, both due to very loose credit, these two growth engines are NOT poised to restart economic growth anytime soon.

In fact, just the opposite is true. Any recovery will be held in check by the massively overbuilt inventory of residential real estate and the inability of consumers to tap savings and credit to purchase consumer goods at the level needed to “stimulate the economy”.

Thus, while it looks like we avoided the Great Depression II, we’ll probalby remain in the Great Recession I for some time.

What do you think? Whether you agree or disagree, please add your comment below and show me you’re alive!