The threat of a double dip recession has been widely debated in the media and in the public, since we entered the recession back in 2008. The most recent findings from the National Bureau of Economic Research, (NBER), show that we officially existed the recession back in June of 2009. Many would debate that finding, since we still have almost 10% of Americans out of work, a national debt fast approaching $13 trillion, and the vast majority of small businesses unable to access credit to fund start-up, hiring, or expansion. Nevertheless, the data show that the U.S. economy generated positive GDP growth in the third quarter of 2009, and has been showing positive growth since.
In this week’s column, I will review some of the key data-points that can provide some insights into the complex world of economics, to try and gauge the possibility of a double dip recession. With the next reading on GDP growth coming on October 29th, the debate will likely intensify as to whether or not we will slip back into recession, or reverse the decline in GDP growth we witnessed in the second quarter of this year.
First, let’s define a double dip recession. Once the economy has shown at least two consecutive quarters of negative GDP growth, the economy is officially in a recession. After the recession ends; meaning that GDP growth has turned positive, a double dip would occur if GDP growth turned negative again.
A good way to visualize it is to think of the shape of a ‘W.’ If you were tracking the growth of the economy on a chart, and you had a double dip recession, the chart would resemble a ‘W,’ with the two bottom points of the ‘W’ representing the two dips. We had a double dip recession in the early 1980’s, so there is a precedent for it.
The economy fell into recession from January 1980 to July 1980, shrinking at an 8 percent annual rate from April to June of 1980. The economy then entered a quick period of growth, and in the first three months of 1981 grew at an 8.4 percent annual rate. As the Federal Reserve under Paul Volcker raised interest rates to fight inflation, the economy dipped back into recession (hence, the "double dip") from July 1981 to November 1982. The economy then entered a period of mostly robust growth for the rest of the decade.
We experienced the longest recession since the Great Depression, (affectionately referred to as the “Great Recession”), which officially started in December of 2007, and lasting 18 months. The NBER panel was quick to point out, likely anticipating the negative reaction from the public, that their finding that the recession ended in June of last year did not mean that the economy had returned to robust growth.
"The committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity."
So, is there anything we can look at to try and judge whether or not we will double dip? There are many economic indicators that we can watch that do impact the economy directly, and therefore can give us some sense of the direction of the economy.
Unemployment is one of those indicators. Unfortunately, unemployment is a lagging indicator, meaning that it tends to keep doing poorly, even after the economy starts to get better. We have seen direct evidence of this during the latest recession, which again ended, according to NBER anyway, in June of last year, while unemployment didn’t peak until January of 2010 (if you believe we have seen the worst unemployment numbers already; I am not convinced). This means that there was a 6-month lag between the end of the recession, and the peak in unemployment. Unemployment peaked at 10.6%, and is now at 9.6%, so we are still very close to the high. What is concerning to me is that we dipped to 9.3% in May, but then the rate of unemployment increased to the 9.6% (August 2010) where it stands today. Which direction will it go from here? I do not think we have seen the peak for unemployment yet, and if it continues to rise, the impact on the economy could be significant and negative. We will get the next reading for U.S. unemployment on October 8th, which will be for September 2010.
Compared to the U.S. unemployment rate, California’s has shown a similar trend, although the rate is higher, with a peak of 13.2% in January of 2010, and a current rate of 12.4% (August 2010). California also dipped lower to 11.9% in May, before rising to the current 12.4% level. Santa Barbara County hit 10.4% in January of 2010, (close to the peak for the U.S. overall), and then dipped to 8.3% in May, before bouncing up to the current (August 2010) 8.9%. The rising unemployment trend for the U.S., California, and Santa Barbara County are not encouraging, and could certainly contribute to a double dip recession.
The trend of GDP growth is also concerning. After hitting bottom in the first quarter of 2009 with -4.9% annualized growth, we turned positive in the third quarter of last year, with 1.6% growth, peaking at 5% growth in the fourth quarter of 2009. GDP growth has fallen, however, for the past two quarters, dipping to 3.7% in the first quarter, and again to a revised (just this week) 1.7% in the second quarter of this year. Where will it go next? We will find out on October 29th, when third quarter GDP growth will be announced. Until then, we can all debate the fate of the economy. My personal view is that it will dip even further, possibly to below 1% annualized growth, and there is a distinct possibility that it could go negative.
With 70% of total U.S. economic activity attributable to consumer spending, consumer confidence—the gauge of consumer attitudes about the economy’s future—is extremely important, and can offer some insights into future economic growth. On September 28th, the Conference Board reported the September Consumer Confidence Index had dipped to its worst level since February of 2010, with a reading of 48.5. This was a significant drop from the August reading of 53.2. One interesting aside on this data series is the impact of the home buyer’s credit—$8,000 tax credit for first-time home buyers and $6,500 tax credit for repeat home buyers—that ended back on April 30th. Although April was a long time ago in economic terms, many of the data series that we track lag, (just like unemployment), so the impact of the home buyer’s credit is still showing up in the data. The dip in consumer confidence may be the first sign of the end of the home buyer’s credit, and if this is the case, we could easily see consumer confidence and consumer spending sink further over the coming months. If this happens, the negative impact on the economy could easily be enough to push us to negative growth, and by definition, into a double dip receission.
Lynn Franco, Director of The Conference Board Consumer Research Center stated: “September’s pull-back in confidence was due to less favorable business and labor market conditions, coupled with a more pessimistic short-term outlook. Overall, consumers’ confidence in the state of the economy remains quite grim. And, with so few expecting conditions to improve in the near term, the pace of economic growth is not likely to pick up in the coming months.”
Home prices are another indicator of economic activity. The so-called wealth effect—the psychological impact that a person’s perceived wealth has on their spending habits—is directly and significantly impacted by home prices, because, for most of us, the value of a home is the single largest component of personal wealth. When home prices decline, as they have during the recession, personal wealth is negatively affected; and people tend to spend less when they believe that their net worth has declined. Although home prices have improved from the lows last year, they recently dipped slightly, very likely due to the home buyer’s credit ending. If prices continue to decline, consumers may curtail their spending even further, weakening the economy, and possibly contributing to a double dip recession.
Any one of these economic indicators (and there are many others we could examine) could be dismissed. We know that the measurement and methodology of calculation of each is questionable at best. However, taken together, the conclusion I draw from the data is that the possibility of a double dip recession is real, and the chances of falling back into recession are, perhaps, more significant than most economists would have us believe.