6/24/2009
By Conley Turner, Research Analyst

The US economy is clearly at a major crossroad as the bulls and bears are engaged in a robust debate about the near term outlook. A recent report by the World Bank served to add fuel to that fire when it sounded the alarm that the US and global economies could fall into two recessions in quick succession. The international institution warned that the potential for a second financial market shock currently stands as a clear and present danger to any economic recovery.

The basic premise of the forecast was that current global output is likely to shrink by a rather aggressive 2.9% in the current year. This is a sharp variance from the 1.7% decline that the World Bank had previously forecasted.  According to the Bank, this potential contraction could conceivably extend into 2010.  Following this train of thought, the Bank trimmed its outlook for economic growth in 2010, citing a likely 10% decline in trade along with the adverse impact on commerce created by the banking and credit crises.

This conclusion was reached after keen consideration was given to the substantial amount of input by the governments of United States and internationally to shore up the economy and to forestall an outright depression. It also flies in the face of the "green shoots" theory being espoused by the government and the prognostications made by other institutions that the worst of the economic crisis has indeed passed. 

The divergence in the points of view serves a reflection of the complexities surrounding the current crisis and the constantly evolving challenges it poses the global economy. To quote Bush Administration Defense Secretary Donald Rumsfeld, "There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know." In the context of the economic outlook, there are still a number of risk factors that can act as hindrances or can outright mitigate any recovery. These include the fact that the unemployment rate continues to be on the rise. The Obama administration has had to revise its projection of peak unemployment to 10% from 8%. President Obama said on June 23 that unemployment would likely top 10% before the end of the year.  Furthermore, many banks still have large portfolios of troubled assets despite the many government intervention plans. 

It was in the early 1930s that then US President Herbert Hoover addressed the economic crisis of that time launching his own recovery plan.  The program was enthusiastically embraced and a robust market rally ensued.  It eventually faltered as a constant flow of news served to undermine investor confidence.  The take way from this anecdote is that confidence can be strong in the beginning of a situation but can ultimately prove to be fleeting once endurance becomes necessary.