Not everyone believes that the end of the world is here.

Pent-Up Demand Could Quickly Pull Economy Out of Its Hole

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By JUSTIN LAHART

Last year's credit crisis hit the economy with a surprising jolt, and most economists expect the recession to drag on until at least the end of 2009, with only a meager recovery after that.

But just as economists were caught flat-footed by the sharpness of the downturn, history says they could be surprised by the speed and strength of the recovery -- once the economy shows signs of turning around.

The last time the economy saw as abrupt a drop-off was after President Jimmy Carter, in an attempt to break the back of rampant inflation, persuaded the Federal Reserve in March 1980 to introduce stringent controls on the use of credit.

Coming when the economy was already weakening, the credit controls had an immediate effect on behavior. Sales fell sharply and companies shed workers at an alarming rate, with the economy losing a million jobs between April and June. Final sales, a measure of overall economic demand, fell by an inflation-adjusted 7.5% in the second quarter -- a drop even steeper than the 5.2% decline final sales registered in the fourth quarter last year.

The 1980 analogy may be the best available to the shock that hit an already-weak economy in the fall, when credit markets seized up, according to AllianceBernstein economist Joseph Carson. "That was government-induced; this one is market-induced," he said.

On July 3, 1980, when the Fed removed the controls, economists had little hope that a recovery would happen anytime soon. The Fed agreed, forecasting that the economy would contract for the rest of the year. In fact, July was the end of what would be the shortest U.S. recession on record. With the credit crunch over, consumers and companies raced to buy what they had held off on. Final sales rose 5.4% in the third quarter, and a further 3.6% in the fourth.

Such rebounds are actually the norm. Of the 10 largest quarterly drops in final sales over the past 50 years, nine were followed by rebounds the following quarter, with an average gain of 5.4%. The chance of any rebound in the current quarter seems far-fetched after last week's dismal reports on January manufacturing activity, chain-store sales and jobs. Still, if the government's coming stimulus package and bank plan are able to restore a modicum of confidence in the economy, recovery could come surprisingly quickly.

With the population increasing and companies figuring out ways to be more productive, the natural thing for the economy to do is grow. "Zero is not the norm," said Chris Varvares, an economist at Macroeconomic Advisers. "The norm is 2% to 3% growth."

When the economy contracts by as much as it did in the fall, it means that consumers and businesses are forgoing spending that they might otherwise see as necessary purchases.

In a normal year, for example, about 5% of the cars, pickups and other light vehicles on the road are sold for scrap. With roughly 250 million light vehicles in the country, that means that just to keep up with the scrap rate, about a million new vehicles need to be sold each month. The last time more than a million light vehicles were sold in the U.S. was August, according to the Commerce Department. In January, just 655,200 vehicles were sold -- the lowest number in the 33 years of the government data.

Mike Darrah, owner of Darrah's Automotive & Recycling in York, Pa., said the number of cars people have brought to him to scrap has fallen by 40% to 50% since September.

"People are driving more clunkers," he said. "They don't have the money for a new car. They don't have the money to fix the clunkers. They're getting by on as little as they can."

Similarly, companies have cut back on new equipment spending to the point that they may no longer be keeping up with the rate of depreciation on their old equipment. In the fourth quarter, spending on new equipment and software fell at a 27.8% annual, inflation-adjusted rate -- the steepest decline in 40 years.

Once consumers and companies start thinking the worst is behind them, they will have some spending to catch up on, as they replace holed socks, keyboards with sticky keys and the like. It may not take long for firms that have laid off employees to find that they don't have enough workers to keep up.

"A lot depends on how quickly the government can spend, and I've never known the government not to be quick about that when it's put its mind to it," said Northern Trust economist Paul Kasriel. "They are going to be pouring a lot of money into this economy in a short period of time and it could bounce. It could bounce big."

But recovery would need to be treated with caution. Recent research from economists Carmen Reinhart at the University of Maryland and Kenneth Rogoff at Harvard finds that in the aftermath of a banking crisis, a country's economy, on average, contracts by 9% over a period of two years, while its unemployment rate climbs by seven percentage points over four years. It's a drawn-out process often punctuated by false starts.

"You're still deep in the hole and there's this reprieve that makes it look as if things are getting better, and they roll over and die again," Ms. Reinhart said.

Here's the sobering lesson: The economic expansion that followed the 1980 recession was one of the briefest on record. Rampant inflation and overdependence on a manufacturing sector facing stiff foreign competition were still problems, and by mid-1981 the economy was careening into the longest downturn since the Great Depression. After years of heavy dependence on credit-fueled spending, a quick recovery for today's economy could also prove fleeting.

Write to Justin Lahart at justin.lahart@wsj.com