Saturday, August 29, 2009

Oil Data Defines Recession Shape

It is widely accepted that the recession has ended.  Now the debate centers on the type of recovery. I wondered whether the shape of the current recession could be described with oil, or more precisely with oil demand via the number of miles driven on US highways.

Will the recession and recovery be classified as a V (sharp slowdown and equally sharp recovery), U (long trough between entering and exiting the recession), W (two V-shaped recoveries over a short period of time), or L (economic recovery takes a long time or perhaps never occurs) shaped recovery?

The chart below appears to indicate that the US is not going to suffer an L-shaped recovery, but instead is either in a U-shaped recovery or is perhaps on the first leg of a W-shaped recovery. The number of miles driven by US motorists would put the start of the recession at December 2007 and the end at April 2009. In fact, using oil demand data, one can pinpoint the precise nadir of US economic activity during the recession as the first week of October 2008.

Data for above chart from FHWA.  Grey bars indicate recessions defined by NBER.
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