Double-Dip Recessions – Part Two

August 12, 2010

I posted an an article on this site eight days ago presenting the results of an examination into the frequency of “double-dip recessions” in the United States.  That article noted their rare occurrence — only three in the nineteenth century and two more in the last century — and pointed out that single recessions are mistaken sometimes for double-dippers because they contain one or more quarters of positive GDP growth.  Genuine double-dippers need to embody a clear period of expansion between two distinct downturns, an interlude that does not exceed a year in length.  U.S. business cycles are definitively labeled by the National Bureau of Economic Research, which makes determinations of cycle troughs and peaks long after they happen and on the basis of many criteria such as employment, personal income, industrial production, GDP, and retail and wholesale sales.  An end-point to the recession that began in December 2007 has not yet been declared formally but is widely assumed to have occurred in the summer of 2009.

This past week has seen intensifying market speculation that the United States may in fact be poised for a double-dip.  One can think of many factors that could create such a setback:

  • The uncertain U.S. federal tax law environment.  Huge changes in January hinge on what, if anything, the Congress decides to do.  In the meantime, decisions that could produce economic activity are getting delayed, pending clarification of this uncertainty.
  • The populist push to begin withdrawing monetary and fiscal stimulus.  A second fiscal stimulus was not legislated in 2009, and it shows.  Real government spending advanced only 0.7% in the year to 2Q10, down from gains of 2.6% in the year to 2Q089 and 2.4% in the year to 2Q09.
  • Uneasiness and confusion about the effects of the healthcare and financial system reform bills.
  • A policy-induced cool-down of China’s economy.
  • Anxiety over the European sovereign debt crisis, which hit a crescendo in May.
  • Eroded U.S. competitiveness caused by dollar appreciation since November 2009.
  • A politically charged season until Congressional elections in November has put many projects on hold.

Evidence presented in my article of August 4 doesn’t rule out a double-dip recession but rather just underlined how seldom such business cycles tend to occur.  In that column, I also suggested that it’s possible that a recessionary business cycle in the future might on close examination turn out to be another stage of the huge recession that began somewhat more than two and a half years ago.  This sequel article has two objectives: 1) to closely document recent labor market and other indications of a significant regression in the economy and 2) to assert that any future recession would in all probability be a different downturn from the recession of 2008-9 and qualify as a double-dip cycle.

The economy seemed to be performing okay just before the onset of the financial crisis in August 2007.  New jobless insurance claims averaged 308K per week in the four weeks to August 5, 2007.  This proxy for the layoff rate was associated with a 4.6% unemployment rate in July 2007 but marginally negative employment growth of 12K per month in May-July of that year.  The table below documents these labor market vital signs at this benchmark date and at subsequent milestones:  the one-year anniversary of the financial crisis, a couple of weeks after Lehman Brothers failed, the start of 2009, April 2009 when the severity of the recession crested, the two-year anniversary of the financial crisis, Thanksgiving 2009, and the third anniversary of the crisis which happens to coincide with the present time.

  Jobless Claims, four Week Avg Jobless Rate NFP jobs, 3Mo Chg, ‘000s per mth
08-05-07 308K 4.6% -12K
08-03-08 420K 6.1% -246K
10-04-08 483K 6.6% -449K
01-03-09 528K 7.7% -727K
04-04-09 658K 8.9% -669K
08-08-09 566K 9.7% -358K
11-28-09 461K 10.0% -128K
08:07-10 474K 9.5% +27K

The improving trend in new unemployment insurance benefits stalled last November.   After dropping by about 200K from peak, such averaged 460K per month in the thirty-six weeks to July 10 but 473.5K in the most recent four weeks to August 7 and hitting a five-month high of 584K last week.  One sees above that in times of economic expansion even when GDP isn’t really booming, the layoff rate typically runs comfortably below 400K per week.  Real GDP advanced 3.2% annualized in the second quarter of 2007 and ticked up 0.6% one year later in the second quarter of 2008 when in fact enough other compelling data like employment were signaling a recession.  The most severe recessionary quarters were a sequence of annualized contractions equaling 4.0% in 3Q08, 6.8% in 4Q08 and 4.9% in 1Q09. 

After a much more mild 0.6% annualized drop in the second quarter of last year, positive growth occurred in each of the four subsequent quarter cumulating to 3.2% between 2Q09 and 2Q10.  Retail sales and industrial production in the year to June advanced by 4.8% and 8.2%, and net growth in jobs of 1.006 million occurred between December 2009 and May 2010 with some help from temporary census counters.  These revival trends appear sizable enough and long enough from the standpoint of duration to constitute a nascent recovery business cycle.  The NBER hasn’t called the recession over yet to give enough time for possible data revisions and determine with strong confidence in exactly which month the ending occurred.

Economic growth slowed from 5.0% annualized in 4Q09 to 3.7% in 1Q10 and 2.4% in 2Q10.  It appears that GDP growth last quarter was significantly weaker than the initial government estimate, perhaps even more than a percentage point less than the reported 2.4%.   Private employment rose by only 51K in May, 31K in June and 71K in July.  Industrial production eked out a gain of 0.1% in June, the latest released month, and while retail sales fell in both May (1.1%) and June (0.5%), such posted a 1.0% gain in the second quarter as a whole.  All that is evidence of weak growth but not the fingerprints of a new recession — not yet.  Unfortunately, the timeliest information like weekly chain store sales and jobless insurance claims, as well as forward-looking barometers like factory orders or pending home sales point to continuing weakness. Business cycles feed on themselves, so the economy is badly in need now of a positive shock to stop the latest momentum, which has been increasingly worrisome.  A cumulating stock market retrenchment after July’s upward bump would be just what the economy doesn’t need at this juncture.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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