Let’s stop talking about a ‘double-dip’ recession
Barely a day goes by without some expert publicly worrying whether or not the U.S. economy will fall into a “double-dip” recession. In a CNBC interview last September, investor George Soros said he thought the U.S. was already in one. Earlier this month, the former chief global strategist for Morgan Stanley cited an academic study to argue that “after every financial crisis there’s a long period of much slower growth and in almost every case you get a double dip.” Granted, this is a minority view; most economists are predicting sustained modest growth for the near future. Which makes sense, because while few are thrilled with the pace of comeback, the U.S. economy has grown for 11 consecutive quarters, beginning in mid-2009.
But given that the recovery is approaching its third birthday, how far away from the Great Recession do we need to get before another downturn would be considered not a “second dip” but simply a separate recession instead?
For all its ubiquity, there is no uniform definition of what a “double-dip” recession is; even the origins of the term are hazy. One analyst wrote in a 2010 research note that the term dates from about 1994, when there was concern about sliding back into the 1991 recession. But Safire’s Political Dictionary traces the term to a 1975 BusinessWeek article, attributing it to an unidentified economist in the Ford administration. (Tellingly, the “double dip” the government feared back then did not actually materialize.)
Much of what is meant by “double-dip” recession is intuitively clear: It’s what happens when a recovery is so feeble that, soon enough, an economy sinks back into contraction. It’s the “soon enough” part that no one can agree on. Investopedia defines double dip as “when gross domestic product growth slides back to negative after a quarter or two of positive growth.” If that were the case, fear of a double dip would long ago have subsided.
Of course, an imprecise term need not be useless. There can be good conceptual and historical reasons for associating an economic downturn with one that preceded it. Many Americans naturally think of the Great Depression as a single, sustained economic horror that began with the stock crash of 1929 and didn’t end until the U.S. entered World War Two at the end of 1941. Technically, that’s not true; the U.S. economy actually began growing in 1933 and continued to grow until 1937, when a second dip hit. But the economy had shrunk so severely in the first dip that it never got back to its pre-’29 level by the time it began contracting again – which redeems the popular fusion of two recessions separated by a weak recovery into one Great Depression. Some economists have claimed, more contentiously, that nearly back-to-back recessions in 1980 and 1981-82 qualified as first and second dips.
But that’s not what’s happened this time around. According to the Bureau of Economic Analysis (BEA), the American economy bottomed out in the Great Recession in the second quarter of 2009, when GDP sank to $13.85 trillion, a shrinkage of about 3.9 percent from the then-all-time high a year before of $14.42 trillion. Since then, we’ve far surpassed that previous high-water mark, with current GDP at $15.32 trillion. One way to think about this: The distance between where we are now and the previous high of 2008 is greater than the distance between that 2008 peak and the 2009 trough. Even using what BEA calls “chained 2005 dollars” (in other words, accounting for inflation), current GDP is higher now than it has ever been.
Why, then, do we keep hearing about a double dip, instead of a new recession? Part of the reason seems to be psychological, a sense that weaknesses that were manifest in the Great Recession – slow job growth, too much reliance on Federal Reserve activity – have not been fully addressed. As Alan Levenson, chief economist for T. Rowe Price, told me: “A turnaround always looks like a struggle. Each time we live through a slowdown, we feel like the economy can never grow again.”
Why the unemployed stay unemployed
This is a response to Don Peck’s book excerpt “How chronic joblessness affects us all.”
By Gary Burtless The opinions expressed are his own.
First, from a labor economics perspective Peck’s analysis is basically correct. In modern capitalist labor markets, long-term unemployment tends to feed on itself via the mechanism that Peck describes. It gets increasingly difficult for the unemployed to get re-employed the longer their unemployment lasts. (There are some hard statistics showing this is true, and that it is true regardless of the state of the economy.) The impact of this phenomenon on the overall unemployment rate became clear in 1980s Western Europe. Countries like France, Germany, Denmark, and Italy that had enjoyed unemployment rates below those in the U.S. for much of the previous three decades found themselves with jobless rates higher than those in the U.S. More worryingly, their unemployment rates stayed above the U.S. rate for a very long time.
It became clear than much of the difference was the gap between the two continents in long-term unemployment (that is, joblessness that lasts longer than 6 months or a year). Europeans who remained in unemployment longer than 6 or 12 months tended to stay unemployed, sometimes up until the age they qualified for an old-age pension. Even when the European job market improved, these unfortunates stayed unemployed. Employers hired from the ranks of already-employed workers (i.e., those who were on other employers’ payrolls) or from new graduates. They tended to shun the long-term unemployed.
Second, it appeared that the European long-term unemployed eventually failed to exert any downward influence on European wages. It was almost as though these unfortunates had become invisible to employers, unions, and governments in the wage-determination process. The availability of millions of willing – but long-term-unemployed – workers did not restrain unions in their wage demands or employers in their willingness to offer higher overall wages. What became clear by the second half of the 1980s was that when European economies started to improve, wage gains also started to rise – in spite of the fact that there were still millions of long-term unemployed workers who would have been happy to fill new job openings at wages below the prevailing wage rate.
Third, one popular theory at the time to explain this kind of hysteresis (i.e., the tendency of high unemployment rates to persist for a long time) was that the skills of long-term unemployed workers atrophied the longer they were without work. Economists said there was “structural unemployment,” by which they meant that the long-term unemployed no longer possessed the skills needed for the industries and occupations that were expanding. My own explanation is a bit different. I believe that when the job-seekers’ queue is very long (as it is when the unemployment rate is 7 percent or higher), employers can be very choosy about who to hire. They can indulge many of their prejudices about which job candidates are most likely to be productive workers and which are most likely to be losers. A candidate who’s been unemployed 6 months, 9 months, or, God help him, 12 months or longer looks like a very bad bet – even if the truth is the opposite.
There is a young economist at Texas A&M named Joanna Lahey who conducted a very clever experiment showing that employers discriminate against job candidates older than, say, age 50, even when the older applicant’s qualifications are precisely the same as a younger candidate’s. If Lahey re-ran her experiment to see how often employers respond to job applications from workers with identical job qualifications, but with different spells of unemployment (say, 0 weeks, 5 weeks, 15 weeks, 26 weeks, 39 weeks, and 52 weeks), I’m pretty confident she would find that employers are much less likely to respond to the job applications of people who have been unemployed the longest. This behavior is not entirely irrational on employers’ part (especially when they’re receiving 50 job applications for each opening). But their screening method means that many of the long-term unemployed will thoughtlessly be denied access to dozens of jobs for which they are perfectly suited (or even “over”-qualified).
I agree completely with Don. The mindless pursuit of profit eventually bites the profit seeker in the hand. Also, the tendency for employers to summarily reject workers who are not currently employed should be outlawed for the sake of the misfortunate as well as everyone else. The most optimistic result for society is to have to bear the cost of disposing of the dead that litter the landscape. A burden on society that should be imposed on the corporate community who refused to think independently and simply threw the older worker and or long term unemployed under the bus. Without giving a thought to the fact that that person earned a right to be productive.
How chronic joblessness affects us all
This is an excerpt from “Pinched: How the Great Recession Has Narrowed Our Futures and What We Can Do About It.”
By Don Peck The opinions expressed are his own. Last summer, the phone maker Sony Ericsson announced that it was looking to hire 180 new workers in the vicinity of Atlanta, Georgia. But the good news was tempered. An ad for one of the jobs, placed on the recruiting website the People Place, noted the following restriction, in all caps: “NO UNEMPLOYED CANDIDATES WILL BE CONSIDERED AT ALL.”
Ads like this one have been popping up more frequently over the past year or so; sometimes the ads disappear once the media calls attention to them (a spokesperson for Sony Ericsson said its ad was a mistake). But new ones continue to appear.
The prohibition against the unemployed applying for jobs is an unjust by-product of the desperation of many unemployed Americans, who have inundated companies with applications, sometimes indiscriminately. And it also shows the extent to which this is still a buyer’s market, in which employers can afford to be extraordinarily selective. But these restrictions may portend something more enduring, as well. Temporary unemployment can become permanent after a time; companies sometimes ignore people who have been out of a job for a year or two, and the economy—somewhat shrunken—just moves on without them.
The economic term for this phenomenon is hysteresis, and it can be one of the worst consequences of a very long recession. When people are idle for long periods, their skills erode and their behavior may change, making some of them unqualified even for work they once did well. Their social networks shrink, eliminating word-of-mouth recommendations. And employers, perhaps suspecting personal or professional dysfunction even where it is absent, may begin to overlook them en masse, instead seeking to outbid each other for current or recently unemployed workers once demand returns. That can ultimately lead to higher inflation, until the central bank takes steps to depress demand again. The economy is left with a higher “natural” rate of unemployment, a smaller working population, and lower output potential for years to come.
The blight of high unemployment that afflicted much of Europe in the 1980s and ’90s is a case in point, and an important cautionary tale. The persistence of high unemployment resulted from several factors, including overly rigid labor markets in some countries and welfare programs that dulled the incentive to find a job in many others. But analysis by the Johns Hopkins economist Lawrence Ball reveals that much of it was the result of hysteresis caused by a long period of disinflation and weak demand in the early and mid-1980s. In some countries, the natural rate of unemployment rose by five to nine percentage points.
The scars from this period will be deepest for the unemployed, but they will be felt by most of us. Communities marked by high, persistent unemployment devolve over time; social institutions wither, families disintegrate, and social problems multiply. Many American inner cities still bear scars from the sudden loss of manufacturing, and the attendant rise in male unemployment, in the 1970s. Parts of Europe now struggle with a burgeoning underclass. When geographically concentrated, idleness and all its attendant problems are easily passed from one generation to the next.
There are many jobs out there and many qualified applicants. It is too bad that there are hiring managers that do say that candidates need to be currently employed. Many of the unemployed are through no fault of their own and are missing out on some good talent.
from MacroScope:
Emerging markets: Soft patch or recession?
Could the dreaded R word come back to haunt the developing world? A study by Goldman Sachs shows how differently financial markets and surveys are assessing the possibility of a recession in emerging markets. One part of the Goldman study comprising survey-based leading indicators saw the probability of recession as very low across central and eastern Europe, Middle East and Africa. These give a picture of where each economy currently stands in the cycle. This model found risks to be highest in Turkey and South Africa, with a 38-40 percent possibility of recession in these countries. On the other hand, financial markets, which have sold off sharply over the past month, signalled a more pessimistic outcome. Goldman says these indicators forecast a 67 percent probability of recession in the Czech Republic and 58 percent in Israel, followed by Poland and Turkey. Unlike the survey, financial data were more positive on South Africa than the others, seeing a relatively low 32 percent recession risk. Goldman analysts say the recession probabilities signalled by the survey-based indicator jell with its own forecasts of a soft patch followed by a broad sustained recovery for CEEMEA economies. "The slowdown signalled by the financial indicators appears to go beyond the ‘soft patch’ that we are currently forecasting," Goldman says, adding: "The key question now is whether or not the market has gone too far in pricing in a more serious economic downturn."
Obama and the American dream in reverse
“It’s like the American dream in reverse.” That’s how President Barack Obama, ten days after taking office last year, described the plight of Americans hit by the faltering economy. His catchy description fell short — the dream has turned into a nightmare for tens of millions.
So much so that an opinion poll this week showed that 43 percent of those surveyed thought that “the American Dream” is a thing of the past. It “once held true” but no longer does. Only half the country believes the dream “still exists,” according to the poll, commissioned by ABC News and Yahoo against a background of dismal statistics on growing poverty, inequality, unemployment, and Americans without health insurance.
Before turning to the gloomy numbers, a brief detour to the meaning of the phrase “the American Dream,” long a familiar part of the U.S. (and international) lexicon. The survey defined it as “if you work hard, you get ahead.” That’s neat shorthand for the concept that the American social, economic and political system makes success possible for everyone.
More expansive definitions of the American Dream invariably feature home ownership, and there the dream went into reverse on a particularly large scale, with the subprime mortgage boom and subsequent housing bust. Last year alone, there were 2.8 million foreclosures — 7,700 a day — on homes whose owners could no longer afford their mortgages.
The statistic that best explains growing doubts over the achievability of the American Dream was released by the Census Bureau in mid-September. In 2009, the Bureau said, 3.8 million people joined the ranks of the poor by falling below the poverty line, defined by the government as an annual income of below $22,000 for a family of four.
In contrast, the net worth of the 400 richest Americans rose by a healthy eight percent in the year to August, according to a list by the business magazine Forbes published a week after the poverty figures. That perpetuated a rich-poor gap of proportions similar to the 1920s, before the Great Depression. For most of the past four decades, the annual incomes of the bottom 90 percent have changed relatively little while those of the top 1 percent have tripled.
In terms of equitable distribution of income and wealth, the U.S. is closer to Iran, Argentina or Mexico than to Canada or Germany. (That is according to the Gini index, a complex statistical measure of inequality named after Corrado Gini, the Italian economist who devised it in 1912.)
To create the United States required the intellect and the painstaking debates of the Founding Fathers; to run it into the ground, only the crew of anti-intellectuals now ensconced in Washington.
“No thought, knowledge, or consistency is required in order to destroy,” writes Ayn Rand,
unremitting thought, enormous knowledge, and a ruthless consistency are required in order to achieve or create. Every error, evasion, or contradiction helps the goal of destruction; only reason and logic can advance the goal of construction. The negative requires an absence (ignorance, impotence, irrationality); the positive requires a presence, an existent (knowledge, efficacy, thought).
Evil men, though impotent, can disappoint, deceive, and betray the innocent; if they turn to crime, they can rob, enslave, and kill. This is one reason that man needs to practice the virtue of justice (to distinguish between the good and the evil). Peikoff, L. 1991
The Objectivism Research CD Rom: The Works of Ayn Rand [CD-ROM]. Available: http://www.amazon.com/Objectivism-Resear ch-CD-Rom-Works/dp/0971178704 Accessed on 2010/09/21
from The Great Debate UK:
Double dip a done deal?
-Jane Foley is research director at Forex.com. The opinions expressed are her own.-
Earlier this week the S&P 500 was down 15 percent from its April 2010 high. The ongoing debate on whether the U.S. economy is poised for a double dip recession can be linked with these falls.
At present there is insufficient evidence to conclude that the U.S. economy will fall back into recession, though there are signs that the recovery could be losing momentum. A key question is whether the adjustment in asset prices seen since the end of April has been appropriate.
Proponents of double-dip imply that asset prices may have further to fall. In contrast, die hard bulls suggest that equity valuations are looking cheap. In the past few sessions, the bulls have been gaining the upper hand.
The reining in of government fiscal incentives and in many cases the implementation of austerity measures suggests that economic growth in most of the developed world will be constrained for the next few years.
The release a month ago of the much worse than expected May U.S. Labour report was followed by a bout of poor U.S. housing and confidence data that had the effect of triggering a wide scale debate about the prospects for double dip recession in the U.S.
Welcome to the Teenies, sorry about those returns
-James Saft is a Reuters columnist. The opinions expressed are his own-
As we say goodbye to a decade so abysmal it never even earned a nickname, it is time to take bets on how the coming 10 years will shape up in economics and financial markets.
Welcome, then, to the Teenies, a word that will describe the decade as well as the small returns in financial markets and the shrinking financial sector it will bring.
So, let’s run through some themes for the 2010s:
Banking – The decade will end with meaningful reform of banking in place, but what is not clear is if this happens soon or only after a new banking crisis brought on by an unwillingness to take tough steps now. The likelihood is that regulation limits leverage and causes the share of the economy captured by financial services to shrink. It will be a lousy decade to be a shareholder, but given the government backing, perhaps not a bad one to be a bondholder.
It will be a great decade in which to have credit skills; even if the ratings agencies escape meaningful reform, everyone is going to want to do their own homework and a shrinking banking sector will open up highly profitable opportunities for alternative avenues of credit.
Investment - Just as the last decade started with dot-comfever and ended with unease, the next one will be all about reconciling oneself to moderate returns and figuring out who is hurt worst by a world of slower growth, less volatility and less debt. My theory is that a balance sheet recession means growth in the developed world for the next few years will be restrained at best. The past few months have been heady, but don’t be fooled, it will be very hard work to make an overall portfolio return even 8 percent. As those expectations slowly deflate, pension fund risk will become much more important in investing. General Motors will not be the last icon partially brought down by its obligation to retirees.
Great article Nostradamus.
Because of all the money that has been printed, we are facing stag-/hyperinflation, so there goes our returns as per the Fisher-effect. Rolfe Winkler pointed that out in 2009.
If we are serious about the environment, growth will have to decrease even further, I wrote something about that under Agnus Crane’s column on Mortgage Giants, for the lack of a relevant article coming up.
I doubt whether middle to top bracket tax payers/voters will bail us out, so the Teenies will come with serious hormonal fluctuations and acne.
Bankers will never let go. It was and is a fatal error to view certain markets as ‘emerging’ as they emerged long ago and then went into hiding to now overdevelop ? Those guys are too bright and informed to allow bubbles. What goes for the US housing/residential market goes for the rest of the World, the Tower of Babel in Dubai a good example. Who cares about a reserve currency anymore ? I think the next decade will also see an exponential growth in conflict between two of the main religions, both geographically and politically, not leaving superpowers many reconciliatory options…
I nominate you for the 2009 ‘Advocacy’ prize under the following link:
http://blogs.reuters.com/fulldisclosure/ 2009/12/29/honoring-free-expression-onli ne/
ps: voomies, because it costs to exit and re-enter the market while paying off somebody else’s mortgage’s capital and interest component while losing out on the US tax breaks.
from The Great Debate UK:
Residue of the Great Recession
- Don Drummond is Chief Economist at TD Bank Financial Group. The opinions expressed are his own. -
The Great Recession is over in North America. But repair will be a slow work in progress and great risks remain. Many of these risks are centred on policy matters. The recession shook our understanding of some policy matters to the core, leaving more questions than answers.
The Great Recession produced deep output and employment losses in many countries, certainly including Britain and the U.S., but also an unprecedented degree of synchronization around the globe.
That synchronization produced the first annual output loss for the global economy since data began in the early 1960s. Fortunately, we are also seeing synchronization in the recoveries, to the point that global output should rise about 4 per cent in 2010.
The tighter degree of synchronization of cycles is likely a permanent feature of the global economy going forward. In part, it reflects unprecedented co-ordination of policy responses. International policy co-ordination could help promote growth and reduce the severity of cycles if the group-think reflects wisdom. But errors could have magnified impacts of taking almost all economies down. Much is at stake. But much is also in question.
The Great Recession shattered an emerging smugness in monetary policy circles that keeping inflation low and stable would at least dampen cycles if not eliminate them. At best one can only say now that controlling inflation is a necessary but not sufficient condition for economic stability.
Monetary authorities, above all in the UK and the U.S., produced shock and awe with the breadth, depth and rapidity of their actions in driving down interest rates and injecting liquidity and capital.
from The Great Debate UK:
Why is the UK still in recession when the U.S. isn’t?
Recent U.S. gross domestic product data show the world's biggest economy emerged from recession in the third quarter, while in the UK data show that in the same period Britain's economy contracted.
British economist and author John Kay theorizes that Britain is mired in its worst recession on record in part because government support has not been evenly distributed across sectors.
"We've poured money into the financial sector -- by and large the financial sector in Britain is doing OK," he said. "But very little of that is getting through to small and medium-size businesses out there in the rest of the economy."
Countries differ. It would be unrealistic to expect all countries to march in lockstep. For example, I still do a double take every time I hear someone here refer to the “last recession in 1990″ – as someone whose customers were mostly overseas, I struggle to remember that in here the UK the tech crash did not infect the wider economy as it did elsewhere.
As to small businesses, it’s difficult – clearly some of them will have been given credit they shouldn’t have been given in the first place, and will now have to go to the wall. Giving government largesse to them would merely postpone the day of reckoning. On the other hand, it’s probably at least partly true that the banks no longer have enough people who can accurately assess the creditworthiness of small businesses who want loans. So some babies are likely to be thrown out with the bathwater.
Japan, nominally lost, not really so
Al Breach was Russia economist with UBS and Goldman Sachs and is currently managing partner of TheBrowser.com. The views expressed are his own.
HOSTENTAL, Switzerland – How bad was Japan’s “lost decade”? As we look east for clues as to the possible fate of western economies, it is worth dwelling on what actually happened, and not just how it was reported.
Japan’s stock market bubble burst at the end of 1989, and house prices started to fall about a year later. Asset prices at the peak were wildly inflated. Stock prices were trading at ratios of well above 50 times boom-time earnings, while the total value of housing represented around 300 percent of GDP.
These bubbles had formed after decades of rapid growth and, critically, even more rapid credit expansion. Total bank credit to the private sector had risen to 200 percent of GDP, doubling over 20 years.
Despite grammatical errors, aplenty, the body of your work is largely accurate. However, it would be reckless to assume the consequence as reached in your conclusion.
The myriad forces working to create our future, today, defy the most rigorous of models employed to determine it.
If you expect to be surprised, profoundly, by the future, then you shall never succeed to be.
Some forty years ago when economists began building algorithms for [American] econometric models, it became clear that there is a breakeven point in GDP growth where growth balances the steady increase in labor pool growth related to popultion growth. This breakeven point was estimated to be in the range of three to five percent.
The definition of a recession became two quarters of less than breakeven growth. The definition of a depression was two years of [average] less than breakeven growth.
A year ago, the CBOE developed a rule-of-thumb figure of 2.75%.
Putting this together, we can understand why Paul Krugman, Nobel Laureate in Economics and a number of other bona fide economists (not self-professed pundits with rosy agendas) have been saying for two years now that the United States is in a depression that Krugman calls the Third Depression.
Since the Great Recession started in 2007, it’s clear that the United States has been in a depression for over four years, soon to be five and expected to last at least another five years.
There have been several stories, some carried by the mainstream networks that the current depression may actually be deeper than the Great Depression, especially in light of key statistics that have been deliberately distorted over the years to make the economy seem less sick than it is. Source: United States Labor Department’s Bureau of Labor Statistics (BLS). The “official” unemployment rate is a deliberate distortion, under-reporting under-employment and real unemployment using the definition of people who were working and could still work, but are not rather than the lie that they’re “no longer in the employment pool” and (adding insult to injury) “no longer looking for work”.
Maybe you’ve noticed the slew of articles over the past five years that claim that housing is “turning around” or “bottomed out”, only to find it’s not true. Just in the past month up until yesterday, AP had side-by-side articles that claimed that housing was up with another that said it was down.
What do most people call these kinds of statistics? Lies? Something else?