No Double Dip Recession

Talk of an impending double-dip recession is likely just that, talk.

The flow of economic news is hardly encouraging. Jobs growth remains disappointing. Recent readings on consumer spending and business activity show weakness as well. If the picture of the housing market has improved a bit, it still hardly portrays strength. Meanwhile, China’s slowdown and Europe’s recession further depress people’s moods and their expectations. Talk of an imminent recessionary dip has become common, for the third time now in as many years. But though there is a temptation to go along with this flow, the history of double-dip scares itself recommends restraint. After all, double-dip forecasts from 2010 and 2011, popular as they were, missed both times. They will likely miss again this year, too, not because the economy is strong, for it most definitely is not, but because it exhibits none of the excesses that typically lead recessions. 

Certainly, there is no denying the weakness implicit in the recent flow of data. During the last four months, payrolls have expanded by an average of only 97,000 a month, insufficient even to keep up with the growth of the labor force. The unemployment rate, not surprisingly, has ticked up. Having briefly inched down from 9.1 percent of the workforce in summer of 2011 to 8.1 percent last April, it stands now at 8.3 percent. The consumer, who came into the spring quarter with a relatively free-spending attitude, has cut back. Retail sales during the three months to June declined at a 4.5 percent annualized rate, and overall consumer spending, which includes a more stable service element, has increased a mere 0.8 percent annualized rate in real terms. Business orders for capital goods, which had shown considerable strength, declined at a disturbingly rapid rate during most of the last six months. Meanwhile, China has reported a much slower pace of growth overall and especially in industrial output, while the news out of Europe indicates deepening recessions, even in Germany, which previously seemed almost immune to the economic trouble in the Continent’s periphery.                  

Without dismissing this ugly picture, it would be a mistake simply to extrapolate it, as so many double-dip forecasters do. Economic data carries a great deal of noise that can easily mislead. Order figures in particular are renowned for their volatility. They can rise rapidly for a period of months, overstating strength, and then correct down for a few months, overstating weakness.  In this most recent case, the weight of decline exhibited during the last six months already seems to be reversing, with orders surging at a 25.7 percent annualized rate in May and June. So, too, retail sales ebb and flow, even as the underlying situation remains substantively unchanged. 

Last year’s double dip scare offers a good illustration how easily such noise can mislead popular forecasts.  The year 2010 ended with an encouraging economic picture. But by spring 2011, matters had begun to deteriorate. Consumer growth had slowed in real terms to less than 1.0 percent at an annualized rate, not much different than the events of this past spring. Residential construction, having offered the first signs of expansion late in 2010, seemed to relapse into decline by spring 2011, falling in real terms, according to the national income and products accounts, at a 2.4 annual rate. Businesses spending on new equipment and software, which had boomed at real growth rates in the high teens during 2010, suddenly seemed to falter early in 2011. This sour picture held true for exports as well. Little wonder then that many forecasters at the time called for a second recessionary dip and described matters as having gone from “bad to worse,” as many are doing now. But by late 2011, almost all these lines of spending and growth had improved. Indeed, that improvement so exaggerated the economy’s underlying strength that, by early 2012, impressionable forecasters erroneously began to overestimate the economy’s trend rate of growth. 

It would seem likely then that the recent spate of bad news reflects this kind of pause rather than a more fundamental recessionary turn. Much of the consumer’s shortfall during the spring months, for instance, stemmed from a cutback in spending on automobiles. Alone this cutback shaved almost 0.7 percentage points off the overall rate of real GDP growth during the second quarter. But this downward adjustment followed a period of six months during which such spending surged at a 20.5 percent annualized rate. Is it not then more likely that these recent cutbacks are temporary reaction to that surge? Is it not more likely that the consumer going forward will settle on a more moderate path and not, as the easy recession forecast implies, continue these sharp cutbacks? After all, the national auto fleet remains old compared with historic norms, and wage and salary income, despite poor employment growth, has risen, in response to heavy overtime, by some 4.5 percent over the past 12 months. But even more than such particulars, no sector, apart from the federal government, faces the kind of excesses and short falls that typically presage recession. 

Corporations, for instance, may have paused in their spending on new equipment and software, but it certainly is not because they lack the financial resources.  As of the first quarter this year, the most recent period for which complete data are available, non-financial corporations held liquid assets of over $15 trillion, up about 20 percent from 2008.  These assets stood at more than 111 percent of overall liabilities.  Debt levels had fallen from over 80 percent of net worth in 2008 to 68 percent.  This is hardly a constrained situation. 

Similarly, the householder sector has reduced its outstanding indebtedness by over $800 billion since 2008.  The burden of debt obligations on after-tax income has dropped during this same period from 19 percent of after-tax income to 16 percent. Household net their worth has increased by 17.4 percent, while liquid financial holdings have grown in relative terms from 3.0 times overall liabilities to about 4.0 times. Matters are still far from as good as they were in the early 1990s, before the debt boom took off, but they are still much improved and far from as precarious as they once were.  Meanwhile, the inventory of unsold residential real estate properties has declined to 6.6 months’ supply, still on the high side compared with historical norms but well down from over 9 months’ supply this time last year and over 12 months’ supply a couple of years ago. Recent signs of modest price appreciation underline this improvement. 

None of this suggests an economic boom. The same forces that have held back this recovery so far remain in place. Decision makers continue to labor under a heavy legacy of fear left by the severity of the 2008-09 recession. Uncertainties about the situation in China and Europe do nothing to lift that weight. Questions about policy directions in Washington also hold back spending at the consumer and the business level, prominently the “fiscal cliff” facing the country at the start of the new year but also the many remaining questions about the effects of the huge, complex, and far-reaching legislation, such as the Affordable Care Act and the Dodd-Frank financial reform. But if prospects still point to sub-par growth, the improved fundamentals suggest that another recessionary dip any time soon is unlikely.

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