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It would be the grossest of understatements to observe that the economics profession has hardly covered itself in glory by its abysmal forecasting record over the past two years. Not only did most Wall Street and academic economists fail to foresee the severity and length of the worst post-war U.S. economic recession. For the most part, they strongly doubted that the bursting of the largest U.S. housing bubble on record would result in a recession at all.

Seemingly un-chastened by their display of excessive optimism in 2008 and 2009, the consensus of economic forecasters is now cheerfully predicting a V-shaped U.S. economic recovery in 2010. In so doing, it seems to be oblivious to the strong historical experience which suggests that severe financial crises are uniformly followed by the shallowest and weakest of economic recoveries. It also seems to be turning a blind eye to the many powerful headwinds that the U.S. economic recovery now faces.

Ever optimistic, the majority of economic forecasters, especially on Wall Street where they are paid to be optimistic, is now choosing to underplay how fundamentally different the recent Great Recession has been from the typical post-war economic recession. For a start, these forecasters gloss over the fact that the underlying cause of the Great Recession was the bursting of the largest U.S. housing market bubble on record. More importantly, they choose to ignore the fact that the depth of the Great Recession was the result of the bursting of a super credit bubble, which resulted in a "once in a century" financial market crisis.

Extensive research by the International Monetary Fund and by Professors Kenneth Rogoff and Carmen Reinhart should be providing a cautionary tale to economic policymakers as to what to expect in the aftermath of a severe financial market crisis. Drawing on the various experiences of the Great Depression, Japan's lost decade in the 1990s, the Nordic banking crises of the early 1990s, and innumerable emerging market financial crises, Rogoff and Reinhart's research conclusively suggests that one should expect only a very gradual recovery after a financial crisis of the severity of that now experienced in the United States. In the light of this research, it would seem that the onus rests squarely on the optimists to explain why this time following a major financial crisis the U.S. economic recovery will be any stronger.

The optimists argue that the current episode of acute U.S. financial market distress differs from previous such episodes in that it has been met by a prompt and very powerful fiscal and monetary policy response. However, an important factor overlooked by the optimists is the paltry response of the U.S. economy to date to the massive amount of policy support that it has been receiving. Following an unprecedented four quarters of negative economic growth, during the third quarter of 2009 the U.S. economy managed to grow at a mere 2.2 percent annualized rate. This has to raise the very real question as to whether the U.S. economy might not experience a double dip recession in the second half of 2010 once the beneficial impact of the fiscal stimulus on GDP growth has faded.

A stark reality overlooked by the optimists are the very strong headwinds presently confronting the U.S. economy, which almost certainly guarantee the most sub-par of U.S. economic recoveries. Amongst the more important of these headwinds are the extraordinarily large gaps in the U.S. labor market as underlined by an unemployment rate, including discouraged and involuntary part-time workers, that has now reached a staggering 17 ½ percent of the U.S. labor force. The persistence of large labor market gaps will almost certainly preclude the income growth needed to support a consumption-led economic recovery as companies continue to take advantage of a weak labor market to cut wages. In addition, the U.S. still suffers from a still highly dysfunctional financial system that is not lending, a commercial real estate bust that threatens to worsen as U.S.$500 billion in commercial real estate loans come due in 2010, and a renewed decline in home prices as the cresting wave of home foreclosures finds its way onto an already glutted U.S. housing market.

As the U.S. economy enters 2010, it does so with the most fragile of economic recoveries that is now being challenged by a whole host of domestic economic headwinds. The U.S. economy is also facing a global economy that is now being seriously challenged by renewed deflation in Japan and by serious tensions within the Euro-zone as markets focus on the large imbalances in Greece, Ireland, and Spain. These considerations make it highly implausible that Wall Street’s dream of a V-shaped U.S. recovery will materialize. Instead, policymakers should brace themselves for an L-shaped U.S. economic recovery that could very will give way to a double dip recession when the present fiscal policy support to GDP growth fades in the second half of the year. One has to hope that policymakers soon come to the realization that the last thing that the global economy needs right now is a premature exit from the policy stimulus of the past year.

Desmond Lachman is a resident fellow at AEI.

Photo credit: iStockphoto/Stefan Klein.