Thursday, June 4, 2009

Friedman’s pluck is a slowpoke

The latest Credit Suisse economic forecast focuses on Milton Friedman’s “plucking model”. It basically means that the economy operates like a plucked string: the farther you stretch it on a down cycle, the stronger and faster it snaps back. That’s what created the V-shaped recoveries after severe downturns in previous cycles. Their view is that in the current environment we are not going to see (as we discussed earlier) the usual “snapback”.

"The pathology of the current episode could produce a mediocre or muted recovery because of concerns that the banks are not in a strong position to lend and/or the customers are not eager to re-leverage."

The CS forecast is fairly optimistic relative to others: 2.4% annual GDP growth for the US in 2010. What’s striking however is their view of the length of time it will take to get back to the previous cycle peak as compared to earlier recessions:

Friedman’s pluck according to CS is much slower on the way up. So far the evidence supports their view. Here are the latest chain store sales numbers (year over year) excluding Wal Mart: down 4.6% - the consumer continues to be in a deleveraging mode.

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