The Future of the Economy: Four Possible Scenarios

Is the deep recession / depression in the United States coming to an end?

Is the US economy about to break free from the crushing grip of a near 18 month old downturn?

If so, then where do we go from here?

Here are four possible scenarios for the US economy going forward:

1. The W-shaped recession. In a W-shaped recession, you have an initial downturn, followed by a brief upswing in the economy, which is then followed by another downturn.

If this scenario were to take place, then it would mean that all of the stimulus that is currently being injected into the global economy would have had little effect. It would likely mean that a major bank had failed, and that banks were continuing to refuse to lend out any significant sums of money.

Possibility: Moderate

2. The L-shaped depression. Japan, the world's second largest economy, experienced this type of downturn in the 1990s.

In this scenario, the slight uptick in economic activity that we are currently experiencing would be just a blip. Home prices would continue to decline. Economic stimulus wouldn't take hold due to a refusal to lend, as well as a refusal from American consumers to spend.

In this scenario, you would likely see:

a) continued heavy declines in real estate markets worldwide
b) continued heavy stock market declines
c) spiraling unemployment rates
d) continued deflation

Possibility: Low. Given the amount of stimulus being injected into the American economy, I see little likelihood for this scenario.

3. Powerful recovery leading to high inflation. The US economy quickly regains its footing. Lending spikes as banks start to recover and investors take advantage of great deals and low interest rates.

The job market starts to recover. Consumers are emboldened by stronger job prospects, increased access to credit and a large pile of savings. They purchase new cars, new homes and start to travel once again.

The economy, once flat-lining, is now red-hot. Inflation surges and governments across the world race to raise interest rates in an attempt to prevent the fragile global economy from overheating.

Possibility: Moderate.

4. Economy recovers, new bull market begins. The banking industry stabilizes. Unemployment numbers temporarily breach the 10% mark but start to tick lower. The housing market stabilizes and starts to head higher as buyers sniff out deals. Americans are emboldened by the fact that the country survived the worst economic downturn since the Great Depression and start to flex their considerable buying muscle.

A cautious optimism starts to pervade the public consciousness as the housing and stock markets tick higher, and the unemployment rates trend lower.

Possibility: Moderate to moderate-high.

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I wanted to point out that I am not a perma-bull - you have likely gotten this idea if you are a regular reader of this blog.

Instead, I try to imagine possible scenarios and then try to determine the probability of these scenarios coming to fruition, based on various factors.

My belief is that the American economy (and global economy by extension) is currently in the process of stabilizing, and that we will likely see a return to growth over the coming years.

I believe that people will continue to distrust the stock market as a place to invest their hard-earned money.

I also believe that people will begin to plow their savings into the housing market once again, taking advantage of low interest rates and a high number of "deals". I expect that a great deal of any wealth that is generated over the next 10-15 years will come in returns from the housing market.

In order of highest probability to lowest, I have:

1. Economy recovers, new bull market begins.
2. Powerful recovery leads to high inflation.
3. W-shaped recession.
4. L-shaped depression.

Filed under: General Knowledge