Investing For The Rest Of Us: What Exactly Is a Double Dip Recession and What Are The Odds Of Having One?
Treasury Secretary Timothy Geitner thinks that the United States will not experience one, President Obama warned way back in November of 2009 that we could head into one, and some economic pundits believe we’re already in one. Everyone seems to have their opinion as to whether our fragile economy will experience a “double dip” recession or not.
Opinions are good. They form the basis for most discussions taking place today – from economics, to politics, and beyond. For those of us who make our livelihood giving financial advice, a well formulated opinion may well determine whether we can pay our mortgages or not.
First, let’s define a double-dip recession. In simple terms – and according to the website Investopedia, a double dip recession occurs when gross domestic product (GDP) growth slides back to negative after a quarter or two of positive growth. A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession. Got all that?
Robert Hall is a smart fellow. He’s chairman of the National Bureau of Economic Research. The NBER is a group of academic economists that has the job of officially declaring when a recession begins and when it ends. In terms of a double dip, the NBER believes it is a continuous recession that’s punctuated by a period of growth, then followed by a further decline in the economy.
Hall explains, “The idea (hypothetical because it has yet to happen) is that activity might rise for a period, but not far enough to complete a cycle, then fall again, and finally rise above its original level, only then completing the cycle.”
Hall goes on to say that the United States came closest to a double dip recession in 1980-1981. Unfortunately for those who might want their definitions based on real events rather than hypothetical ones, the NBER found that there were two closely-spaced recessions – not a double dip. Professor Sung Won Sohn of California State University disagrees. He believes the 1980-1981 period was indeed a double dip recession. Brian Bethune is an economist at IHS Global Insight. “There is no mathematical formula, it’s a judgment call, “ he says.
So there you have it. A double dip recession is to the financial world what pornography is to the Supreme Court. We may not be able to precisely define it, but we should be able to know it when we see it.
With the lingering problems in the economy, you might think a double dip recession – by any definition – is inevitable. A lack of jobs, the housing crisis and Europe’s debt problems are just a few of the many unsolved issues still with us. Interestingly though, many economists think the odds of a second recession have actually shrunk. In a recent July report, Joseph Haubrich, head of the banking and financial institutions group at the Cleveland Fed states that, “the yield curve suggests growth won’t slow to less than 1 percent and a 12 percent chance of recession in the next year.” Others agree.
The chief economist with Standard & Poors, David Wyss, puts the odds at 20%, down from his forecast of 25% earlier this year. Derek Hoffman, founder and editor of The Wall Street Cheat Sheet dropped his odds from 50% to 20%. Helping these forecasts were strong first quarter corporate earnings and an economy that grew at a 2.7 percent annual rate in the first quarter.
None of this means it’s time to break out the champagne. The current recovery will be slow and sporadic, but the “end of earth” scenarios found in the 24 / 7 news media are greatly overstated. There’s still a lot of rough road ahead, but slipping back to where the economy and the market was in March of 2009 is becoming more and more remote.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Glenn “Chip” Dahlke, a Senior Contributor to The Living Trust Network, has 30 years in the investment business. He is a Registered Representative with LPL Financial and a principal with Dahlke Financial Group. He is registered to transact securities business with persons who are residents of the following states: CA. CT, FL, GA, IL. MA, MD. ME, MI. NC, NH, NJ, NY.OR, PA, RI, VA, VT, WY. Securities offered through LPL Financial. Member FINRA/SIPC. Contact him at chipdahlke@dahlkefinancial.com or at his office on Ashlawn Farm in Lyme, CT (860) 434-4261.
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