Some economists are projecting that the U.S. may be facing a double-dip recession. Others say that the recovery will hold. Have we had so much bad news that we just can't take any more and everyone has fallen into a pessimistic funk? Maybe. But maybe not.
There is at least some evidence that our recovery is slowing, right when it should be picking up steam. On the other hand, economic recoveries after severe recessions are long. The Great Recession was deep and dark and it will take a long time, with many peaks and valleys, to fight our way out of it. Especially since the bad news keeps on coming.
What is a Double-Dip Recession?
A double-dip recession occurs when, at the end of a recession, the Gross Domestic Product (GDP) turns into positive territory for a one or two quarters and then falls back into negative territory, signaling another recessionary period. This occurs when the recovery was not stable and often when job layoffs are happening and there have been big spending cuts during the last recession. However, double-dip recessions also usually happen in the presence of inflation.
The Chances of a Double-Dip Recession
- The GDP
- Jobs
- Consumer Confidence
- Consumer Spending
- The Stock Market
- Other factors
There is the GDP. The GDP was positive in the last two quarters of 2009. It was approximately 2.2% and 5.6% respectively. It remained positive in the first quarter of 2010 at 3.0%. The GDP grew less than expected largely because unemployment is still high causing decreased consumer spending for goods and services.
Many economists don't worry about this, saying that this will be a jobless recovery, which we've experienced before. Other economists are quite concerned about the number of jobs lost during the recession which was a total of 8 million. Many feel that all of those 8 million jobs will never be brought back due to increased productivity of the U.S. work force. On top of this, we need to add new jobs just to keep up with the growing population. If this is true, we need to add a significant number of jobs each month to make up for the job losses during the recession and to account for growing population numbers. So far this isn't happening.
How does the jobs data look? Not so good. The good news is that, in May 2010, the unemployment rate fell from 9.9% in April to 9.7% as the country added 411,000 jobs. The bad news is that almost all of those jobs were Federal Government Census jobs. The private sector added only 41,000 jobs instead of meeting the estimates of close to 180,000 jobs. Some say not to worry about this because this recovery is going to be long and slow and unemployment will be high for awhile. Others point to this as a sign of a possible double-dip recession.
On the up side, manufacturers added 29,000 of those private sector jobs last month and wages as well as hours worked grew. However, the long-term unemployed remains at about 6.7 million people.
Interesting, consumer confidence rose in May after a decline in April. This happened, however, before the jobs report came out. Consumer confidence rose to the highest level in two years.
What is driving consumer confidence? Even though the jobs data is weak, we are still adding jobs to the economy. If that stops, consumer confidence is likely to plummet.
Because unemployment is still high, consumer spending grew at a low and uneven pace in May 2010. Unemployment causes consumers to rein in their spending. Consumers spent more during the first quarter which probably accounted for the higher GDP.
In May, consumers are also worried about the declining stock market. The market is declining for a number of reasons. First, there is a debt crisis in European that has investors worried. They fear it may carryover to the U.S. Many European economies such as Spain and Greece are almost bankrupt and needing bailouts. This threatens the stability of the European currency.
The stock market has lost almost all the gains it has made in 2010. That is worrisome to investors who are also consumers.
Other factors affecting economy that economists fear may cause a double-dip recession are the BP Gulf Oil Spill, the tension between North and South Korea, and the tensions in the Middle East.
History of Double-Dip Recessions
The double-dip recession is rare. In modern times, since World War II, there was a double-dip recession during the 1980-1982 period. The economy was in a recession in the 2nd and 3rd quarters of 1980. It then recovered (by GDP standards) and fell back into recession in the fourth quarter of 1981 and the first quarter of 1982.
One thing that happened during that time period that we do not have now is inflation and high interest rates. High inflation defeated income growth. Some economists say unemployment will do the same thing now. However, the Federal Reserve is determined to keep interest rates low through 2010.
There are similarities and differences between the 1980-82 double-dip recession and the Great Recession. The one thing we know is that we are generally into a recession before we know it. If we fall into a double-dip recession, we will likely be into that second dip long before anyone can really call it.
