How Strong Will the Economic Recovery Be? A Chart to Accompany James Grant

"The deeper the slump, the zippier the recovery."

That is James Grant's judgment in a nutshell.  The conclusion surprised me, not because I disagree, but because I'm used to Grant being pretty bearish.  His Wall Street Journal article is illustrated with photos of Roosevelt, Greenspan and Buffett (not Jimmy), as well as cute animals.  No wonder the paper is losing money.  His conclusion cries out for a simple chart.  Let's look at the data!

Here it is.  The peak-to-trough change in GDP is shown on the vertical axis.  The growth over the following four quarters is on the horizontal axis.

GDP Recovery

Note: if the current recession troughed in the second quarter of this year at a level equal to the preliminary estimate, then our peak to trough is about minus 3.7 percent, right there at the bottom of the chart.  Imagine a line through the points, and you find this recovery at about 11 percent.

This ain't science, and I wouldn't make a forecast using this methodology.  However, it leads me to wonder if I'm being much too conservative in my own economic forecast.

A final note on the data: the sharp readers are wondering how one recession showed positive GDP growth.  That was 2001, a fairly mild recession.  The actual cycles are set using monthly data, then we do GDP studies by grabbing the quarters that contain the peak and the trough.  For a short, mild cycle, it's possible to get weird quarterly numbers.