Double Dip, Anyone?

November 19, 2009

One indication of investor uneasiness is the frequency of the use of the expression “double dip.”  The term refers to a relapse into contracting activity after an economy has returned from recession to an expansionary phase of the business cycle.  As fate would have it, today’s Financial Times and Wall Street Journal each ran lead front-page stories posing the possibility of a double dip, but what makes this replication unusual is that the reference was different in the two stories.  The Journal’s coverage of yesterday’s announced big drop in U.S. housing starts produced the banner headline, “Fear of Double Dip in Housing.”  The FT’s main story, entitled “Obama warns on dangers of U.S. debt” refers to an interview given by the president to Fox News in which he underlined the need for budget cuts lest the economy slide back into recession.  The piece insinuates that Beijing officials read him the riot act on getting America’s fiscal house back under control.

Double dips are more common than generally realized. Three of the four U.S. recessions during the past 35 years did not consist merely of a string of negative quarters surrounded on each side by nothing but expansion.  The exception was the brief downturn in the early 1990s that had negative growth only in 4Q90 and 1Q91.  The other three recessions had more complex sequences:

  • Real GDP fell in 3Q73, rose in 4Q73, fell in 1Q74, rose in 2Q74, and finished with three consecutive drops in the second half of 1974 and 1Q75.
  • In the early 1980s, GDP fell in 2Q80 and 3Q80, rose in 4Q80 and 1Q81, fell in 2Q81, rose in 3Q81, fell in 4Q81 and 1Q82, recovered in 2Q82, and then posted one final negative quarter in 3Q82.
  • Early in the present decade, negative growth in 1Q01 and 3Q01 sandwiched positive growth in the second quarter of that year.

In the 2008-9 recession, revised data already reveal a ping pong-shaped start to the recession, with an initial quarter of mild GDP contraction in 1Q08 followed by positive growth in 2Q08 before four consecutive negative quarters running from 3Q08 through 2Q09.  Among all these events, only the one in the early 1980s has been designated as two distinct recessions rather than a single one with an irregular pattern.  Likewise, when people talk about the Depression era, the reference is generally for the entire 1930s — hence attributing its end to the Second World War.  In fact, there was a massive collapse of demand and production from August 1929 to March 1933 followed by several years of positive growth and then a second large downswing from May 1937 to June 1938, which is sometimes called the recession within the depression.  By other yardsticks like the jobless rate, a return to normal did not occur until after the decade, so it is not so misguided to think of the entire 1930s as an era of depression.

All of the above simply illustrates that business cycles seldom proceed at a steady linear pace.  At transitions between expansions and contractions, greater attention is fixed upon every indicator and every month of indicators, and surprises like yesterday’s housing starts can produce exaggerated market responses.  Whether GDP rises or falls in any particular quarter, month or week is less meaningful in my view than asking when the economy will be able tolerate meaningful cutbacks in monetary and fiscal stimulus and when growth will cumulate sufficiently to allow the labor market to improve.  Government policies tend to be more sensitive to labor market conditions than to production.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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