Markets' plunge suggests no recovery before September

For months now, economists have tried to predict the shape of the world's economic downturn: a V, a U, or an L.

Monday's stock market plunge and mixed economic reports brought confirmation – if anyone needed it – that we're not in a V, a sharp plunge followed by a rapid rebound.

So the profile of where we stand boils down to either a U – a plunge, followed by months of stagnation before a rebound – or an L – where the months of stagnation drag into years with no rebound in sight.

Dow falls 300

Is the future really that gloomy?

Stock markets think so. The Dow Jones Industrial Index fell below 7000 for the first time since May 1997, tumbling just under 300 points to close at 6763.29 . The S&P 500 managed to stay above 700, only just, at 700.82, but that's still its lowest level since October 1996. Europe's major markets neared lows not seen since 2003. Japan's Nikkei was close to levels not seen since 1982.

If markets predict conditions six to nine months out, then the current funk among global investors suggests that there's no recovery before September at the earliest. That would stretch this downturn to 21 months, longer than anything the US economy has experienced since the 43-month nosedive in the early 1930s.

No big shockers

What's worrisome is that Monday's fall came on news that was largely anticipated.

AIG announced a whopping $61.7 billion quarterly loss Monday, but word of a $60 billion loss had leaked out last week. Even before Monday's announcement, the US Treasury announced it was pumping in an extra $30 billion. That's the fourth time the government has injected capital into the beleaguered insurance giant and maybe not the last time. (Why does the government keep shoveling cash into a money pit? Click here.)

Other economic reports released Monday showed a mixed picture. Construction spending fell by more than expected, but personal income and personal spending surprised analysts with an uptick. Manufacturing shrank again in February but at a slower rate than either of the two previous months, according to the Institute for Supply Management (ISM).

Small note of optimism

In one hopeful sign, the ISM survey found that inventories had shrunk from a record 57.0 in December to a near normal 51.0 in February. "That's encouraging in that maybe we have reduced the inventory overhang," says Norbert Ore, chairman of the ISM’s manufacturing business survey committee, in an interview. At 50, the index signals that inventories are in line with sales.

That data probably won't convince anybody of a rebound. "The nation's economy will be in shambles throughout 2009," famed investor Warren Buffet warned in his annual letter to shareholders Saturday. He said the slump could last even longer.

Maybe the most optimistic view one can take right now is that the economy is bouncing along the bottom of the downturn: Things might not get better but they won't get worse, while we wait for the U-shaped recovery.

But there are plenty of doomsayers, who are bracing for the L.