Monday, March 22, 2010

Double Dip or No Double Dip?

Barron's weighed in on the "Will there or won't there be a double dip recession" debate this weekend.

MANY INVESTORS WORRY THAT THE U.S. ECONOMY will slip back into recession this year or next. They shouldn't. More than likely we will just get more of the same: a continuation of the recovery phase that began last year, followed by a moderate expansion through the rest of this year and next, and a painfully slow decline in the unemployment rate.

Don't fret, there is still much to fear. Among the drags and headwinds slowing the recovery are the struggling housing sector, depressed small businesses and hesitant consumers. Add a central bank hoping to extricate itself from its zero interest-rate policy without causing trauma; red ink in state and local budgets, forcing layoffs and cutbacks; and massive federal debt and deficits extending as far as the eye can see.

The latest threat: fear of another credit shock, most recently sparked by talk of a possible default by Greece. For the moment, those fears have receded.

Despite the obstacles, the recovery is likely to persist, but at nothing like the turbo-charged rates after comparable recessions in the mid-1970s and early '80s (see chart below).

In the past, steep downturns have led to steep upturns. The Great Recession of 2007-09 should therefore usher in the Great Recovery of 2010, followed by a strong expansion through 2011. Many of the normal dynamics of bust and boom are going according to script. But given all the difficulties, expect this not-so-great recovery to continue, followed by a not-so-strong expansion.


Combine these figures, and annual growth averaged 4% in the second half '09 -- not a bad start, but lower than similar periods following recessions of comparable depth and duration. Our prognosis from here calls for economic growth to continue to run at an annual rate of 4% through the first half of 2010. Pessimists complain that growth so far has depended too much on working down existing inventories, rather than increased consumer spending and capital investment. While the first half of this year should continue to benefit from inventory reductions, consumption and investment should begin to kick in more of their fair share in 2010.

That should be followed by a slowdown to about 3% through the rest of the year, picking up to a little better than 3% through 2011.

At that rate of expansion, the flat trend in the number of jobs will start turning up again, probably as soon as this month or next. The unemployment rate, at 9.7% in January and February, down from a peak of 10.1% in October, will keep edging down. But it should remain as high as 8.5% even by the end of next year, nearly three percentage points higher than it should be when the economy has achieved "full employment."

In case you're wondering, I think we're in for a slower rate of growth (1%-2%) from a variety of different sectors.