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Don't Doubt the Double Dip Recession

Economics / Double Dip Recession Sep 10, 2010 - 02:53 PM GMT

By: Neeraj_Chaudhary

Economics

Best Financial Markets Analysis ArticleA few weeks ago Nouriel Roubini, widely regarded as one of the more pessimistic figures on Wall Street, made headlines by raising his forecasted likelihood of a "double dip recession" to a terrifying 40%. The vast majority of "mainstream" economists (although I would argue Roubini himself is part of that pack) described these predictions as far too gloomy.


Although there are some dubious current statistics that the desperate could cite to make an optimistic case, many simply are falling back on the extreme rarity of past "double dips." But, in an unprecedented time, the lack of historical precedent hardly seems to matter. What is far more significant is a raft of new data that point downward.  As the high from last year's monetary and fiscal stimulus wears off, there is a good deal of evidence that shows the U.S. economy plunging into an abyss.

Unemployment continues to batter the nation. Last week alone, the Labor Department announced that initial claims for unemployment benefits fell to a mere 473,000. While US stock index futures rallied briefly on this news, these numbers are not far off the peak of the 2001-2002 recession.

We've spent trillions of dollars on bailouts, stimulus programs, and Cash-for-You-Name-It programs, and we still have nearly half a million new people filing for unemployment every week. As Billy Joel would have asked:  Is that all we get for our money?

Of course, unemployment typically lags in an economic recovery. But the forward looking signs are no better.  Recent data clearly demonstrates that GDP growth is decelerating. After posting a stimulus-inspired 5%+ growth rate in the fourth quarter of 2009, GDP growth slowed to 3.7% in the first quarter of this year, and then puttered to 2.4% in the second quarter (which was more recently downgraded to a much more tepid 1.6%).

But even though GDP growth was marginally positive in Q2, the growth rate of the ECRI's Weekly Leading Index (which measures the prospects for future economic activity) just fell to -10, a level it last hit at the end of 2008 - that is, during the depth of the Great Recession when GDP fell the fastest. Even during the second economic dip in the early 1980s, this measure did not revert to this low level. Any objective view of this data can only lead to one conclusion: this economy is sinking fast, and all the government spending in the world won't keep it afloat.

Under these circumstances, the Federal government would ideally cut its size, in an effort to put more capital into the hands of the private sector, thereby fostering more investment, production, and ultimately more jobs in the economy. Regrettably, the Obama Administration is preparing to do the opposite - the Bush tax cuts of 2001 and 2003 are set to expire next year (effectively raising taxes), and the economy will likely suffer as a result.

According to projections from the Congressional Budget Office, higher taxes will raise an average of $380 billion per year over the next 10 years; this translates into well over 2% of GDP annually, at a time when nominal growth is decidedly below that mark. Even an elementary school student can do the math - we're getting ready to raise taxes by an amount more than the entire growth of the economy; a renewed contraction should not surprise anyone.
 
With unemployment still high, growth slowing, leading indicators signaling further weakness, and higher taxes on the horizon, the only real hope for escaping a double-dip recession lies with exports. If we were to experience a surge in our export sector (while simultaneously holding steady or even reducing our imports), our trade deficit could turn into a surplus, thereby bringing growth to the economy. Indeed, President Obama himself recently called for a doubling of US exports over the next five years.

But once again, the outlook for this sector of the economy is bleak. Despite an improved July report released this week, the overall drift of trade data for 2010 has not been encouraging.  At a time when the US badly needs trade surplus, monthly deficits continue to average well north of $40 billion dollars. Unfortunately, based on government policies that prevent industry from operating more efficiently, export-led growth does not look to be in the cards.

But, despite these clear and dramatic signs of mounting malaise, most economists continue to forecast relatively solid economic growth both now and in the future. According to the Third Quarter 2010 Survey of Professional Forecasters (released in mid-August by the Philly Fed), economists expect real GDP to grow by 2.9% this year, 2.7% next year, and will accelerate to 3.6% in 2012. Given that first half GDP is already well below their forecast for the year as a whole, these economists are therefore predicting a much better second half. If anyone knows where this momentum can be found, please let me know.

But in my view, these economists are way off the mark. In reality, the US economy is weak and deteriorating, and a renewed contraction in GDP - whether officially labeled a "double-dip" or not - is a near certainty. This is not your garden variety recession. Don't expect it to behave like one.

For in-depth analysis of this and other investment topics, subscribe to Peter Schiff's Global Investor Newsletter. Click here for your free subscription.

Click here to download Peter's latest Special Report: My Five Favorite Gold & Silver Mining Stocks.

Neeraj Chaudhary is an Investment Consultant in the Los Angeles branch of Euro Pacific Capital. He shares Peter Schiff's views on the US dollar, the importance of the gold standard, and the rise of Asia as an economic power. He holds a B.A. in Economics from the University of California at Berkeley.


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