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Sharp recession, sharp recovery?

One argument for a strong economic recovery rests on the historical observation that deep declines are followed by sharp rebounds.

Yet, despite the Great Recession being the deepest downturn since the Great Depression, the initial surge of recovery so far has been as anemic as those that followed short, shallow recessions.

What's more, it may be losing momentum.

The latest recession likely ended with the second quarter of 2009, many economists believe. With a shove from government stimulus, U.S. gross domestic product expanded at a 2.8% annualized rate in the third quarter, and many economists think that growth rate will be roughly matched in the current quarter.

That's not bad, but it would amount to a rather paltry 1.4% increase in inflation-adjusted GDP in the first two quarters after recession.

In comparison, by this point following the eight recessions between World War II and 1982, GDP had already increased 4%, on average.

This recovery so far has echoed the shallow recoveries of 1990-91 and 2001, when GDP grew 1.1% and 1.4%, respectively, in the first two quarters out of recession.

It may be too early to properly judge this recovery. Growth could accelerate next year. But there is little to suggest it will.

The Economic Cycle Research Institute's weekly leading index of economic indicators, which spotted the economy's turn early this year, is still "consistent with a steady economic recovery," says ECRI Managing Director Lakshman Achuthan.

But the leading index's year-over-year growth rate has flattened and turned lower after hitting a record high in October. Its absolute level is still below that of July 2008, when the economy was still in recession.

The recovery may live, in other words, but is hardly hearty. And a key segment of the economy, housing, is still on shaky ground, as seen in recent setbacks in mortgage applications, construction and prices.

Surprisingly, many on Wall Street are giving thanks this weekend for the frail recovery—it means the Federal Reserve's easy-money policy will continue to provide a cozy environment for risk-taking. But without fundamental improvement, healthy asset rallies will be harder to achieve in 2010.