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by Don Azarias
Aug 6, 2010
How would you define a “double-dip recession”? Well, according to my Business and Economics reference manual, a double-dip recession is an anomalic economic cycle that occurs when gross domestic product (GDP) growth slides back to negative after a quarter or two of positive growth. It refers to a recession followed by a short-lived recovery, followed by another recession. The National Bureau of Economic Research (NBER) defines it as “a continuous recession that’s punctuated by a period of growth, then followed by a further decline in the economy.” In my personal opinion, I think NBER’s definition is more straightforward and simpler for a lay person to understand.
With stock prices going down and treasury yields on the decline, the market is sending a clear signal these past couple of weeks: The fragile economic recovery may not be sustainable. And in the aftermath of a bleak second quarter, experts are still divided about the likelihood of a double-dip recession. If a double-dip recession will not materialize, what we are witnessing now is the lingering effect of the Great Recession. The economic downward spiral has a double-dip recession in the making as evidenced by the following adverse economic factors: Weak labor and housing markets, lack of confidence by a skeptical consumer base and a global debt crisis that threatens to bring down sovereign states in the European Union (EU), just to name a few. Further declination in even one of these adverse economic factors could be enough to trigger a double-dip recession. Some economists and analysts are more concerned that the high unemployment rate, coupled with unrelenting home foreclosures and high levels of negative home equity, posed an immediate risk of a “double-dip” in the housing market.
For some experts, the prospect of a double-dip recession still seems remote. “I still think it’s very unlikely that the economy will fall into a double-dip,” says John Ryding, a co-founder of RDQ Economics. “Double-dip fears are quite prevalent right now and have been. But I find the situation very similar to the last two so-called jobless recoveries where feelings of double-dip constantly bubbled up to the surface but never materialized,” he added.
For investors, a double-dip, if it materializes, would be a repeat of what happened in 2008, when a struggling economy resulted in dismal returns for stocks. Some economists are predicting that the Dow Jones industrial average could touch 9,000 by the close of 2010. They feel that it is reasonable to expect that kind of scenario.
In the aftermath of a recession that wiped out more than 8 million jobs, the lackluster labor market and high unemployment rate have prevented a budding economic recovery from taking root. The economists are saying that the rate of growth on job creation has been too slow. And due to the effect of unemployment, consumers will be hesitant in opening their wallets to make purchases to stimulate the economy. That, of course, generally translates into stagnant spending levels. Without robust job creation in the coming months, the weak labor market could help thrust the economy into a double-dip recession. With regard to housing, we have seen a rebound in the housing market when President Obama introduced a first-time home buyer tax credit of $8,000 in early 2009 that was later extended to any qualified buyers who signed a sales contract by April 30 of this year. That tax credit, like other stimulus programs, has expired and it doesn’t look now that the upsurge in home buying will continue. Sales of new homes in May fell to an all-time low since numbers were first recorded in 1963.
The concern is, now that the tax credit has expired, the housing market will continue its downward spiral. And the double-digit unemployment rate, coupled with a large backlog of home foreclosures and high levels of negative home equity, posed risks of a “double dip” in the housing market.
Recent government report shows that consumer confidence is plummeting. In June, the Consumer Confidence Index dropped by nearly 10 points, its second-biggest one-month decrease in a year. The report also shows that consumers’ assessments of their current situations and their future job prospects are turning increasingly negative. This has touched off concerns that a skeptical consumer base could stand in the way of a recovery.
Another adverse economic factor is the EU’s debt crisis. It started with Greece’s insolvency followed by Spain’s, Portugal’s, Italy’s and Ireland’s financial shortfalls. There are also some member states that are on the brink. These sovereign states belonging to the EU have all seen their debt downgraded in recent months. Greek debt is now valued at “junk” status. To calm fears throughout the world that Greece could potentially default on its debt, members of the EU have set up a $1 trillion bailout fund.
Still, this fund doesn’t guarantee that countries like Greece will be able to fix their budget woes, and that has implications for the state of the U.S. economy. This will impact the financial health not only of European banks, but that of U.S. banks that have a lot of exposure to them. The interlocked economies of Europe could collapse in a domino effect if one nation fails. Consequently, the end result could be a catastrophic failure which endangers banks worldwide and that could turn into a global recession. The result of G-20 summit held just recently is another one of those adverse factors to consider although, under a normal economic climate, it’s a prudent thing to do. Countries from around the world pledged to cut their deficits over time. But experts are torn over when it’s appropriate to begin cutting spending. Many countries in Europe, most notably Greece and Spain, have already begun instituting austerity programs (through a combination of spending cuts and tax hikes) because of their enormous budget deficits. Here in the United States, deficit hawks have voted down a bill that would have extended unemployment benefits and offered some aid to state and local governments. Politicians in developed and industrialized nations are caught choosing between cutting spending now to begin controlling their massive deficits and risk stunting the economic growth, or authorizing further stimulus to pump life back into the fragile global recovery.
There are really no easy solutions to reverse this economic downturn that has not been seen in seventy years. And, after what the U.S. and the global economies have been through, let’s just hope that we are spared the scourge of a double-dip recession.