If you study U.S. economic history and go back all the way to the 1850s, you will find only three occurrences when the economy fell back into a recession within 12 months of a previous recession. The big question becomes, if a double dip is possible, how likely will it occur today? This is a great question! However, I am not so much worried about the U.S. economy being in a recession as I am about a deep, extended consumer recession.
We have to separate the two. The economy as a whole can be out of a recession (growing), yet consumers can still be in a consumer recession (depressed earnings, lack of savings, lack of credit, lack of spending). The worry about the overall economy trickles down to the consumer and can cause pessimism or optimism. It takes the economy climbing out of a recession before the consumer follows suit. In other words, you can’t have one without the other. So if the overall economy plays an important role for the consumer, will we avoid a double dip?
Two of the previous double dips were pre-World War II (1913 & 1920) and show little resemblance to today’s situation. The other occurrence was in 1980 as the Fed tried to combat double digit inflation. This was back when interest rates hovered around 20% at their peak! The reasons I think a double dip is unlikely is due to two main factors: the Government’s willingness and commitment to:
- Keep interest rates low while unemployment keeps rising
- Spend our way out of the recession
Though these fixes are short term solutions, will they work?
With our economy caught in a pickle between inflation and deflation, it is unlikely that we will slip back into another economic recession. The recovery appears to be on track but at what cost? When our government throws trillions of dollars at the economy (through bailouts, guarantees, and stimulus packages now estimated at $11 trillion), it is bound to have some effect. Let’s not forget the first time buyer home credit ($8,000) and cash for clunkers programs fueled much of the GDP increase that signified we were officially out of the recession. Are we committed to continuing to pile up debt and essentially guarantee future tax hikes?
Americans apparently are growing weary and tired of this strategy as evidenced by the growing number of Tea Parties across the country where democrats and Republicans are standing opposition of the endless spending. Fiscal conservatism seems to be on the rise and in vogue as evidenced by the special elections and governor races that attacked wasteful spending!
While much of the public and media continue to focus heavily on rising unemployment rate and failed stimulus policies, the stock market should continue to watch for improvements that may or may not come sooner rather than later. These government strategies will prove to be costly at some point, whether they work or not is another thing to be seen.
We are in unchartered waters right now and have little history to fall back on here. If the economic tides shift we could be in for a freefall. Even if we are indeed stabilized, we should still expect some sort of sell-off before we continue the advance. When will this occur? No one truly knows! This market has been anything but normal, but history shows corrections need to occur before strength and confidence fully come back to the markets. Please let us know if we can answer any of your questions.