Manufacturing continues to contract. What will the recovery look like?


The headlines are daunting:

I’m sure there are many more such stories, but enough already.

Let’s talk about the recovery.  I do believe there will be a recovery.  This is a terrible down cycle, but all down cycles are eventually replaced with a recovery.

There’s a lot of debate going on about when (this is best called after it happens! 🙂 ) and what it will look like.  One school of thought suggests it will be a v-shaped, sharp recovery.  The argument behind this is that this downturn came quickly and was sharp, so companies turned things off quickly.  Thus, inventories are plunging.  Companies have cut back production more than current demand dictates to keep demand and supply balanced, so inventories are low and getting lower.  Pent up demand combined with extremely low inventories will produce a sharp v-shaped recovery when it happens.

There are others that argue for more of a u-shaped recovery, a more gradual growth when things start to rebound.  The theory here, in part, is that companies are so burned by this downturn that caution will continue to rule the day.

I tend to be an optimist, but on this one I’m not so sure.  In theory, I think the fundamentals are in place – especially the longer this downturn lasts (and by any measure this will be a long one by historical standards) – for a v-shaped recovery.  What has me worried is the psychology.  I think people have really had their confidence rocked on this one and I think all business and consumers are going to tip-toe back into spending as things start to recover.  Jobs play a major role on the consumer side and I sense companies are going to be slow to rehire, similar to the last recovery.

Of course, all of this is crystal ball.  If I knew for certain, I would probably be vacationing someplace warm right now.

What do you think?  Are we in for a v-shaped recovery, a u-shaped or some other scenario I haven’t covered?

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