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The double dip recession: economic boogie man

The double dip recession: economic boogie man

Where the US goes, the rest of the world will follow; so goes the old economic maxim. So is the world on the brink of a second recession? Katherine Azmeh has the US view.

July 11, 2010 12:46 by

It’s a whimsical name for what some fear may become a nasty economic reality: a “double-dip” recession. And the specter of a return to negative gross domestic product in the US, following an optimistic period of positive growth, is increasingly on the minds of both financial types and family folks here in America.

Earlier this month, an employment report from the US Department of Labor suggested that the economic recovery may be slowing, now that certain government stimulus packages have been concluded.

Pessimistic types are looking to gloomy indicators like high domestic unemployment, the European debt crisis, and wobbly housing markets. Combined with “sinking stock prices [they] are all weighing on a fragile US recovery,” the Huffington Post declared earlier in July.

But, like so many things, semantics can make all the difference. Depending on how you define the double-dip recession, plenty of economists see room for that special brand of American optimism that can turn a bad day on the stock market, into a jubilant firesale, depending on how you look at it.

Robert Hall is an economics professor at Stanford University, and chairman of the National Bureau of Economic Research, NBER, a committee of economists charged with officially pronouncing the beginning and end of recessions. His take on the situation suggests that the “double dip” is an elusive, economic boogie man. And while the term might make for some splashy headlines, Hall says a genuine double dip is a rare bird, indeed.

“The idea – hypothetical because it has yet to happen – is that activity might rise for a period,” he explains, “but not far enough to complete a cycle.” This short-lived rise is followed by a second period of decline, and then finally, a period of increases that completes the cycle. If you buy Hall’s definition, then a double dip recession does not pose an imminent threat, and hasn’t for quite some time – at least three decades.

But not all economists employ as much rigor in the definition – seeing as much art, as science, in the matter. “There is no mathematical formula,” declares Brian Bethune, economist at IHS Global Insight. “It’s a judgment call.”

So, what exactly is the view from the US, then? While indicators are mixed, the official word from NBER is that the recession that commenced in late 2007 is still underway, though bright spots illuminate the forecast. After posting declines for four straight quarters, America’s economy returned to growth in the third quarter of last year. And official statistics from the US Labor Department say that the economy added jobs in the first part of 2010.

And while NBER avoids haste when pronouncing good news, analysts at Credit Suisse say that some commentators may be crying wolf, calling the persistent expectations for a double-dip recession “over pessimistic,” Bloomberg reported Wednesday.

“The first-half pullback was due to external shock from the Euro zone,” according to Fan Cheuk Wan, head of Asia Pacific research at Credit Suisse Private Banking.

“We don’t expect a double-dip recession in the global economy. The market is over pessimistic,” Bloomberg quoted Fan as saying.

And the word on the US streets is that analysts are now less concerned over the economic implications of a slowdown in China, citing rising optimism in Asian markets. The expected expansion in Asian economies, strong corporate earnings in the region, and equities rallies in Asian markets throughout the first half of 2010 bode well for sustaining the fragile recovery.

So, while your financial advisor is probably not suggesting you plan that early retirement, those in the know are putting to rest fears of the dreaded double dip.

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