Economy watchers say ‘double-dip recession’ unlikely

Editor’s note: Portions of the following story were first posted in this story by Roby Brock at TalkBusiness.net, a content partner with The City Wire.

Worries about a potential second economic downturn have been the banter of many business talk shows and reports for the last few weeks, but is a "double-dip recession" a serious possibility?

Economic news released Thursday (July 15) showed a dip in applications for unemployment benefits (good news), but a dip in manufacturing activity during June (bad news). This good news-bad news reporting is what keeps the stock markets on a roller coaster ride between bullish and bearish sentiment.

What’s more, the dip in unemployment benefits may be more related to General Motors and other large manufacturers skipping their traditional summer shutdown to retool than a gain in overall jobs creation.

CREDIT ISSUES
In his Second Quarter Investment Review, Stephens Capital Management EVP Brian Bush noted that there have been 33 U.S. recessions dating back to 1854.

According to the National Bureau of Economic Research, there were 32 economic “cycles” (recessions or depressions) between 1854 and 2001, with the average recession/depression lasting 17 months. However, the U.S. post-World War II economy has seen only 10 cycles, with an average length of 10 months for each recession.

"Over that time frame, there have been only three recorded instances of a double-dip recession," he writes, adding that there have been five if you adopt a liberal definition for a double-dip recession. To some, a double-dip recession occurs when following a recession the nation’s gross domestic product (GDP) slides back into a negative trajectory after a quarter or two of positive growth.

Bush’s analysis suggests that a key characteristic of every double-dip recession involved "a severe contraction" in debt or available credit. While commercial and industrial lending have been declining since 2008, according to federal statistics, Bush observed that "only recently have we seen a leveling off of the credit contraction."

That doesn’t imply that the lending environment is improving; it just isn’t getting worse.

"Our analysis suggests that the outlook for growth in the second half of 2010 is uncertain at best," concludes Bush. "And a double-dip recession is not out of the question."



FED CONCERNS
Federal Reserve Bank officials have consistently downplayed the prospects for a double-dip recession. However in the minutes released Wednesday (July 14) from a meeting in late June, officials disclosed that the pace of the nation’s economic recovery has been slower than hoped for.

Despite nearly two years of stimulus injection and easy monetary policy, the Feds’ minutes question what they might do if the "outlook were to worsen appreciably." This has led to recent discussions of an additional stimulus package.

‘FOUR FUNDAMENTALS’
Greg Kaza, economic research and executive director of the Arkansas Policy Foundation, is sticking with his “four fundamental metrics” belief, saying that you can’t predict ups and downs. He says the numbers will provide signs of economic direction.

The four fundamentals — measured nationwide by federal agencies — are employment, production, income and manufacturing and trade sales. He says three of the four have been positive, with employment figures struggling to show signs of life. He does wonder what will happen to the numbers once the temporary Census jobs and stimulus spending trickle away.

However, Kaza has been optimistic about economic recovery for several months. He issued a report in late November 2009 saying the deep recession that began in November 2007 likely ended in June 2009 — making it the longest recessionary period of post-World War II period and longer than the average length of recessions dating back to 1854.



UNCERTAIN PICTURE
Dr. Michael Pakko, chief economist with UALR’s Institute for Economic Advancement and a former research economist with the Fed’s St. Louis branch, says predicting recessions and double-dip recessions are difficult because they are "usually preceded by some unanticipated event."



"If we were to witness a renewed downturn in the economy at this point, it would likely be in response to a new ‘shock’ that is, by its nature, unpredictable," Pakko told Talk Business.



Pakko also notes that defining a recession involves many economic indicators besides GDP, such as production, employment, and real income.



"In my opinion, much of the talk about a double-dip or even about renewed weakness in the economy is groundless. The buzz about a double-dip seems to have intensified following the release of the June employment report, which was somewhat weaker than expected," says Pakko. "However, it is never wise to place too much emphasis on a single data observation."

And like Kaza, Pakko also said employment figures "gyrating through the ups and downs of Census Bureau hiring” provide an uncertain economic picture.