By Susan C. Walker Fri, 25 Sep 2009 16:30:00 ET

Optimism about the U.S. economy is the new cool. So much so that economists and even bearish analysts now lean toward saying, "It's the end of the recession as we knew it." But Bob Prechter sees the recent optimism as part and parcel of the bear market rally. It's the kind of rally that engenders happy thoughts about the future of the economy. In contrast, he points to an employment ratio that tells a truer story of the U.S. economy. This ratio, in addition to his knowledge of stock market history, prompts Prechter to explain why he still sees a depression ahead in his most recent Theorist.

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As Bloomberg reports, economists are now nearly unanimous that the “recession” is over. But I believe they are mistaken in calling it a recession. Since 2000, we have not had two recessions but a slowly developing depression, with rallies. The trend toward depression began in 2000, and it will not bottom for another five to eight years. The economy has been in weak expansion mode for most of this time (this is when commodities had their final runs), but the prosperity of 2000 remains a high-water mark, so the long term trend in the economy is down. Massive credit inflation through early 2008 hid this fact from most observers, because many economic statistics such as GDP were distorted into seemingly positive trends by the collapsing value of the dollar from 2001 to 2008. Certain ratios—see for example Figure 13, a graph of the employment rate—tell the true story. As you can see, it topped when the stock market did, rallied when the stock market did, and fell with it again. Notice that the mid-decade bounce fell well short of a new high, fitting the phony B-wave nature of the stock rally.

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