Will recovery in US economy stagnate soon? Or it is nevertheless V-shaped?

In a weekly column for Forbes Brian S. Wesbury, a chief economist and Robert Stein, a senior economist at First Trust Advisors in Wheaton, Ill. shared their view of the current status of the US economic recovery and their attitude towards widespread forecasts and outlooks.

As we all know just some time ago economists were predicting that the growth and recovery would not show any signs earlier that the end of this year and that if there were any the growth would be insignificant at least through the end of 2010. As the time passed and the statistics agencies burst out with numerous reports proving the growth does take place in America - falling unemployment claims, rising housing starts, growing exports and Monday's Empire State manufacturing index – experts dizzy with the optimistic figures increased their forecasts for the second half.

While some people think that the V-shaped recover foreseen by Wesbury and Stein proved to be right still they may argue that the V-recovery will be followed by a plateau like in a square root. As a proof they may cite the fact that the inventory cycle will add to growth in the near term, but deleveraging and a weak job market will not allow this to build into a sustained recovery.

In this respect Wesbury and Stein express their quite contrary opinion and disagreement. They say: “Easy monetary policy must show up somewhere. While we do not always know where it will show up, in the next year or two a shrinking trade deficit, a turnaround in home building and a revival in business investment and consumption will all help economic growth continue.”

There is still another theory that says any recovery in growth we are seeing right now is due to government stimulus spending. This stimulus is expected to level out and therefore, the theory goes, it will no longer boost economic activity.

Wesbury and Stein respond: “federal stimulus has little or nothing to do with the recovery. In fact, we count it as a headwind--the more government spends, the more it crowds out private investment and economic activity. Meanwhile, the threat of a major expansion in government power, into health care and carbon emissions, has also hurt prospects for growth.

“The real forces behind the recovery have been easy money, an end to the post-Lehman Brothers ( LEHMQ - news - people ) panic, and the FASB's correction of mark-to-market accounting rules. 

While easy money can be thought of as a temporary positive--a sugar high), the end of panic and changes in mark-to-market accounting are more fundamental. What they do is take Armageddon off the table. As a result, the economy and the stock market can reflect the continued impact of technology and productivity. Our stock market model suggests fair value is substantially above current levels, even if interest rates rise as we are forecasting over the next few years.”

Source: Forbes