The big talk these days is over the double-dip, the question of whether or not the economy will slip back into recession. The bulls say no, the bears say maybe, the pragmatists say it doesn’t matter because the economy stinks regardless. The markets are talking about it, the Fed is thinking about it, Spain’s problems are threatening to make it come true.
Look, if the recovery builds steam, as most people still believe, then the economy will grow, jobs will be created, and the government’s efforts will have paid off, no matter the cost and there won’t be any double-dip. If the recovery falters, if the jobs markets stagnates, if wages stagnate, if the government is so squeezed from its last go-round with bailouts and stimulus that it’s unable to blow mind-numbing amounts of money on boosting spending, well, there still won’t be a double-dip. Why?
Because it’ll be a sign the economy never actually came out of the first dip.
The signs are growing that the real economy is hitting a plateau, if not rolling over, as the various and massive government interventions into the private market fade (except for ultra-low interest rates; the Fed’s nowhere near raising them.) What’s pushed the recovery along this past year has has been government intervention, massive stimulus spending, massive inducements to consumer spending, massive monetary easing. It’s all been temporary, however, and as various programs dissipate, the real economy is left to do the heavy lifting. There are indications it isn’t up to that job.
During the long, 43-month recession from 1929 to 1932, “the end” was often proclaimed. In 1930, Henry Ford said business was on an uptrend. “Blame Pessimism,” “Expect Boom” the headlines proclaimed. They were all wrong, and eventually the signs of “the end” gave way to the continued depression (they weren’t afraid to use the word back then.) It’s interesting that the risk trade has come back to life these past few weeks, even as the signs are growing that the economy’s flattening.
The biggest impediment to the recovery remains job growth. In a word, it stinks. Weekly jobless claims remain in the 450,000 range for initial claims, which suggests there isn’t much if any hiring going on. That was backed up by the May jobs report. Without steady hiring, wages will not grow. A report today from the Bureau of National Affairs says wages will “grow at or close to the lowest rate on record in the coming months.” Consumers aren’t into spending what they don’t have anymore, so this is a big fly in the ointment.
Consumer spending has been falling as the various stimulants and tax credits expire. This is to be expected. But it says ominous things about the direction of GDP, given the centrality of consumer spending.
Another red flag is the ECRI’s leading indicator’s index, which has been rolling over and shooting for negative numbers. When this measure was rising, the bulls were all over it. Is it as accurate on the way down?
The ECRI itself last week said the negative reading wasn’t in an of itself enough to signal a new recession threat, but it did say the reading “assures a significant slowing” of economic growth. If it continues down this road, though…
While Morgan Stanley concedes there are a lot of things to worry about, sovereign-debt crisis, lower growth, inflation, the double-dip isn’t one of them. “The double-dip recession and the resulting deflationary pressures that many worry about right now are merely tail risks, in our view.”
There’s a reason the National Bureau of Economic Research, the official arbiter of recessions and expansions, waits as long as it does to to declare the starting points of economic expansion and contraction. For a situation just like this, where the economy shows signs that it’s recovered, only to slide back into recession.
If the recovery falters, if GDP turns negative, as some are suggesting it may, if the NBER declares that the recession never really ended, then where are we? We’ll be looking at a recession that is 30 months long and counting, which makes it the longest since 1929-1932. At that point, we’d have to start considering that this current economic state isn’t a recession, it’s a depression.
There isn’t any formal definition of a depression, which makes coining one tricky. The NBER refers to it generally as “particularly severe period of economic weakness” that lasts until conditions come back to roughly normal levels.
What we’re talking about here and now would be “only” a depression with a lowercase “d,” unadorned by any dread uppercase adjective like “Great.” But you’re talking about a two-plus years downturn, with the same basic root causes across nations and continents, still playing itself out, that saw the global financial system nearly collapse and may still include the sovereign default of a European nation, attended by painfully high unemployment and depressed wages. Well, that sounds like a depression to me.