With all the recent market turbulence and mediocre economic reports, some economists have been warning of a high probability of a second recession ó a double dip ó by the end of the year. But before you get spooked, I would suggest there are a couple more ‘D’s’ we need to look at ó namely Drivers and Data. Once you do that, you will see that these fears are largely overblown.|By Christopher Thornberg, McClatchy Newspapers
With all the recent market turbulence and mediocre economic reports, some economists have been warning of a high probability of a second recession ó a double dip ó by the end of the year. But before you get spooked, I would suggest there are a couple more ‘D’s’ we need to look at ó namely Drivers and Data. Once you do that, you will see that these fears are largely overblown.
First the driver. Economies don’t randomly fall into recessions ó they are caused by a large shock to the system. The last downturn was caused by the combined shock of the consumer-spending pullback after years of home equity fueled overspending, and the debt crisis that the banking system is still digging out from under. The 2001 downturn was caused by the sharp decline in business investment after years of equity market bubble fueled overspending.
What is the driver?
Some say oil prices. But the United States is more resilient to oil prices than ever before, in part because energy spending is a smaller share of consumption that it ever has been, and because Americans have transportation options ó swapping SUV for hybrids. Furthermore, prices are down $30 per barrel from the peak hit earlier in the year.
How about the weak labor markets? Employment is a lagging, not a leading indicator. They sag after the economy does, not the other way around. They don’t cause recessions ó they are caused by them. Last month’s zero net new job growth was driven by the strike at Verizon. With that done, the actual number was plus 48,000. Not good ó but not recessionary either.
The stock markets? It’s true financial turbulence doesn’t help the economy ó but there has never been a stock market crash that caused a recession by itself. Rather, stock-market crashes occur because of whatever negative shock caused the recession. There are many cases, such as in 1988, when the market dropped precipitously ó and no recession occurred because there was no other shock.
Then there is Europe where excessive public debt and slow growth has caused financial jitters aplenty. But the shock ó a default ó has yet to occur. Only lowly Greece is truly on the brink ó and while that would harm some European banks, with the lessons of Lehman Bros. fresh in the minds of regulators you can bet your bottom dollar that a European TARP-type program will cushion the blow to their banking system. Realistically it seems a small probability that any of the major European economies will be in trouble at any time in the next year or more.
Finally, housing. The modest declines in home prices ended in the spring. Now all the major price indexes, including Case Shiller and Core Logic, all show home prices starting to rise slowly. And while sales of homes are softening a bit, the number of seriously delinquent mortgages is falling. The worst is clearly behind us.
So what does the data say? The biggest source of weakness in the first half of 2011 was consumer spending ó particularly in the second quarter. But this was largely due to the brief spurt in inflation that was driven by food and energy costs, combined with a lack of cars on dealer lots. In the former case, the pressure is now off due to falling oil prices. As for the latter ó we know it was a supply issue because the price of cars has risen sharply in recent months ó the exact opposite reaction we would expect if the decline in auto sales had been demand driven.
The supply chain is starting to move again, pushing U.S. industrial production up along with sales, in July. Consumer spending was also up.
The data surrounding leading indicators of consumer demand ó namely delinquency rates on consumer loans and growth in consumer credit ó point to better times ahead. With interest rates falling, this will give consumers more leeway. Another leading indicator of a downturn is falling home starts. They aren’t falling ó they have just been sitting on the bottom for a number of years. And non-residential construction is picking up speed.
As for business spending ó it remains low from a long-run perspective ó so it’s hard to see this turning largely negative. According to bank data from the Federal Reserve, the outstanding quantity Commercial and Industrial loans grew sharply in August. Firms are borrowing for some reason.
So add it up and I see this probability: The chance of a double-dip recession is pretty close to 0 percent for the second half of 2011 short of some major development not highlighted above.
This isn’t to say things are fine. The recovery in the United States is still too slow to get the nation back to the growth trend it was on pre-recession. The result is a labor market that is producing too few jobs to meaningfully bring the unemployment rate down. The federal deficit is frightening, and there could be preliminary signs of inflation creeping into the economy.
But with all the truly worrisome stuff we need to deal with, why create menacing, pointless stories about a phantom double dip?
ABOUT THE WRITER
Christopher Thornberg is an economist and founding partner of Beacon Economics LLC. Learn more at www.BeaconEcon.com. He wrote this for the Sacramento Bee.|