The US economy's "double recovery" The US economy may be on the verge of a big comeback. It could experience an unusual second recovery over the next three years following the weak initial recovery of the past three years. In the past, recessions were followed by one broad-based recovery in economic activity. Pessimistically-inclined prognosticators have been predicting a "double dip" recession for the US economy since it started to recover in 2009. I'm suggesting that a more likely scenario might be a "double recovery." The increasing odds of this happening have contributed to the rebound in US and global stock prices since early October and should continue to do so this year. The US lost lots of jobs during the recession. Instead of a normal V-shaped rebound, the housing industry has been in a depression. The upturn in auto sales has been subpar. In addition, fiscal policy hasn't been as stimulative as in past recoveries because there has been lots of fiscal drag from state and local governments. Yet real gross domestic product is up 5.5 per cent from the recession trough during the second quarter of 2009 to a record-high during the third quarter of last year. That initial recovery was roughly half as strong as the average gain of 9.8 per cent over the same period during the past seven recoveries. In the past, recessions were followed by one, not two recoveries. This time, key sectors of the economy haven't participated in the initial economic rebound, but finally may be on the verge of doing so. The second recovery could take off as the pace of hiring quickens, housing activity finally picks up, auto sales head higher, and state and local governments stop retrenching. If so, then the US would finally enjoy the benefits of a broad-based recovery. Employment is the key. Since the official start of the latest recovery during July 2009, payroll employment is up only 1.1 per cent, significantly lagging the average 5.1 per cent gain of the previous seven recoveries over the same length of time. Why might employment expand at a faster pace? The rebound in profits has been unusually strong during the current recovery. Profitable companies expand. However, they've been cautious about expanding their payrolls as a result of the severity of the last recession and some significant uncertainties and risks associated with the current recovery. That could change now that they don't have as much room to expand by stretching the working week and boosting productivity. In other words, all those profitable companies should soon start hiring more workers. In this scenario, initial unemployment claims should drop from about 400,000 at the end of last year to around 300,000 by the end of this year. If employment growth increases, the unemployment rate will continue to fall. Consumer confidence should rebound, and may have started to do so late last year. In this scenario, consumer spending would grow at a faster clip, leading the second recovery. It too has been subpar so far compared to the previous seven cyclical upturns. The fourth quarter's retail sales suggest that consumer spending may already be picking up. Home sales are showing some signs of life finally. The index of pending sales of existing homes jumped 15.6 points during October and November to 100.1, the highest reading since the expiration of the second homebuyer tax credit in April 2010. An index of homebuilders" confidence rose in January to the highest reading since June 2007. Auto sales totalled 12.8m units last year, up 10.3 per cent from 2010, with the pace strengthening to an annualised 13.5m units during the fourth quarter. There is certainly plenty of upside for auto sales in 2012 and 2013, with sales likely to rise to 15m units. A widespread concern is that there is lots of fiscal drag ahead, especially at the start of 2013 when the payroll tax cut and the Bush tax cuts are scheduled to expire. Of course, they've been scheduled to expire before, but then extended. This year, there is likely to be less fiscal drag because state and local governments aren't likely to retrench as much as last year, when they reduced their payrolls by a collective 244,000. Europe's recession could trip up America's second recovery, or maybe not. One of the most frequently asked questions during my recent meetings in London was how badly a recession in Europe might depress the US economy and S&P corporate profits. There is another side to this story. Better-than-expected growth in the US should help to moderate Europe's recession. In a double recovery scenario, President Obama is more likely to win a second term. He might also get a Congress that remains completely gridlocked. The only unhappy consequence of a double recovery may be that nothing will be done to reduce meaningfully the structural federal deficit for another four years. Edward Yardeni is president and chief investment strategist at Yardeni Research