Expect the talk of a double dip recession to increase as a result of today's employment report. There are several reasons why this won't happen.
1.) Oil is still cheap.
Compare the price of oil right before the last recession (roughly $150/bbl) and today's price (roughly $80/bbl). If oil increases to say $100+, then we have an issue. But there is nothing on the chart today that indicates there is a ton of upward momentum in the market.
Interest rates are still low. The Fed is currently giving money away and the thirty year Treasury yield (pictured above) is still low. US Treasuries are still considered a safe haven which has lowered rates over the last few months to incredibly low levels.
For all the talk of double dip recession, what really caused the last one was an increase in interest rates:
Remember that Volcker increased interest rates to kill inflation. That is what caused the last double-dip recession. Given that rates are now incredibly low, don't expect that to happen again.
See also this post at The Big Picture.
15 comments:
Before we can talk about whether there is going to be a double dip recession we need to know just exactly what it is. Right now, economists don't agree on the definition. One school of thought is that a double dip recession must be two recessions. A recession hits, then there is a period of recovery, but we quickly fall into another recession. Most mainstream economists would say that 1982 was the beginning of the last double dip recession.
The second proposed definition is that a double dip recession is one long recession. A recession begins, followed by a period of recovery. However, before the recession can be declared over, the economy drops further. Most conservative economists say that the last double dip recession began in 1980 (That way Ronald Reagan can't be blamed for the severe downturn in late 1981 and 1982)
My guess is that the two recession definition is what's catching on. This means that first the NBER has to declare the economic downturn that started in 2007 over. Then another recession begins.
I think its premature to say whether the economic recovery is going to falter. Although Bonddad makes some good points on the positive aspects of the economy, this recession is different from past recessions because the downturn is caused by high leverage and a financial crisis. In other words, the 2007 downturn can be classified as a "Balance Sheet Recession." Balance sheet recessions are more severe than ordinary recessions. In fact the Great Depression and the Long Depression that began in 1873 were balance sheet downturns. I believe that the withdrawing of stimulus, the ending of unemployment benefit extensions, and lack of confidence in government are factors that put the economy in danger for a double dip recession. I put the odds at 50-50.
Kind of makes you wonder how much more the market will sell. Oil and equities should have never been at the levels they were back in late April so early in a recovery. But with the exception of housing the data and the earnings don't really justify something like 950 on the S&P. Perhaps minds have been made up already.
Hi Bonddad,
I find this post very interesting because I love using the credit market (here the fed fund rate) to predict recession. The 10 years-3 months also went negative right before each dip of this double dip recession. It might have lost its predictive value today because of the very low level of the interest rates.
The oil price is also a very good predictor of recessions but you might want to consider a relative measure of the price change instead of an absolute one. If you look at the year-on-year percentage change, almost every time it went over 80% we were in a recession or one was very near. And the change rate went over 80% in 2007 (or 2008) and again in 2010.
Let me add that it's very bold of you to say that there won't be a double dip recession when there's only 2 positive indicators : the fed fund rate and the government yield spread. Even the lumber prices are free falling and you said that it was an excellent proxy for the economic activity. You do prefer lumber sales to lumber prices but I think they are linked...
Have a good week-end !
@constant learner
The problem I think with lumber is that it is being distorted at least in some way by the housing credit withdrawal symptoms. Also while you are right about oil prices being up 80% YoY we are talking about two extremely volatile years. Either way we will see which indicators were right or wrong soon enough.
Addendum : while we might not have a double dip per se, we might experience a failed recovery.
@ Anonymous 1:05PM
I'm not a fan of lumber prices mainly because I never paid attention to it before bonddad used it on his blog. And it's volatile. My favorite housing indicator is the Fed's Private Residential Investment which is still negative YoY.
Thank you for linking the end of the housing credit to the fall in lumber prices. If it works the same way as the Cash-for-clunkers program, the uptrend might resume in the coming months.
The Oil price certainly is volatile and let's not forget that it became a coincident (instead of leading) indicator some recessions ago. If it continues going down, it might give us the necessary breathing room for a real recovery.
Finally, I think the indicators are saying that we will have at least something like a failed recovery before any real recovery (unemployment <5%).
There was another bad piece of data today : average hours worked declined.
Regardless of the type of recovery unemployment below %5 wasn't going to happen any time soon. There are too many structural issues that have to be resolved.
The Fed might not be able to set interest rates and interest rates don't have to go down just because the economy is struggling.
There are five factors pulling on interest rates: government borrowing, business borrowing, consumer spending (and how much is done by borrowing), alternative investments, and fear of risk, which is driven by uncertainty. The latter is generally thought of as "risk of inflation", but it could also be currency risk or default risk.
Government borrowing is on the upswing, while business borrowing and consumer spending are on the downswing. If there's a sharp drop in the equity market, that will bring out buyers, reducing the stock of money for borrowing. A drop in equity markets will also send the fear of default risk up.
Under such conditions, there could be a phenomenon like the credit freeze of 2008/9. However, if there's a credit freeze for government, it doesn't have the alternative of going out of business. It cannot fire Social Security recipients or Medicare patients. It would have to raise rates, triggering a rate rise for everyone else, even if the economy is circling the drain.
We are in waters that we have never plied before. Even in the Great Depression, the fear of sovereign default was not greater than the fear of business default. Nor was government as large a factor in the economy, with as many pensioners dependent on it.
I, too, don't think a double dip is likely. I think an extended growth recession (GDP growth less than population growth) is moderately likely. But one cannot rule out interest rate spikes just because the Fed is not eager to raise rates. Sometimes they just happen.
--Charles
Well, I'm a double dipper. I don't believe housing will improve slowly like cars afters cash for clunkers. Therefore there is more pain for the banks, more underwater properties and less consumer confidence. Paying down debt is the only way for the average person to protect themselves, and I include in that 'walking away' and bankruptcy.In jobs the biggest losses have been in construction, and I don't see a huge resurgence in residential or commercial property building.
Internationally have you seen the BDI lately? Not a lot moving around.
The durable goods numbers weren't pretty either.
Cheap oil and interest rates do not a recovery make IMHO. Still the blog is cheery, for which I thank you.
Wells let's see the negative growth components to nominal GDP have been structures,residential investment
and state and local to the tune of
27 billion. Net exports cost a minus 56 billion but that is likely to be lower in the coming quarters. The mother lode si personal consumption expenditures
which added 116 billion in growth.
As long as people with jobs keep spending a negative growth quarter
is somewhat remote....
"For all the talk of double dip recession, what really caused the last one was an increase in interest rates:"
Which interest rate? The 30 year fixed mortgage barely went up at all during the 2003- 2007 boom. It averaged 6.25% in August of 2003 (the high for the year) and averaged 6.16% in March 2007 before peaking at 6.70% in July 2007 before going back down to 6.10% in December 2007 and 5.76% in January 2008. If you adjust for inflation, then real interest rates went progressively downward from 2003 thru 2007.
As for the 10 year treasury, it hit 4.45% in August 2003 and remained within a 4.0%-5.10% range to mid -2008. It went up less during that business cycle than any other cycle since the 1950s.
The federal funds rate did go up progressively from mid-2004 to mid-2006, then remained stable at still fairly low levels until being lowered when the financial crisis became to rear its ugly head. But even with a progressively higher federal funds rate, the fed was still far behind the curve and was conducting in most experts words loose monetary policy to the very end. And considering lending continued to increase progressively during the tightening cycle,
it seems that the cycle didn't end 'til mortgage companies, Wall Street, and global investors ran out of gimmicks to find a greater fool to buy a home. It wasn't the increase in rates. It was lack of a greater fool to keep the ponzi scheme going. When that happened the crash became inevitable as home values needed to come down substantially to find more buyers.
low oil price justifies no recession?
sounds like supply side econ to me.
what if the price is going down due to low demand. After all, money's cheap now and we're still in recession.
not an economist
Conrad -
A big reason for the drop in commodity prices is the dollar's increase since the beginning of the year.
I noticed someone mentioned the Baltic Dry Index. I was wondering when this became an indicator because it seemed to be on peoples radars only in the last 6 or so years. Also, if it only measures pricing and not volume how much of a correlation is there to actual demand and how much can it be shifted by currency fluctuation.
The sheer volume of comments about this here and elsewhere, whether they be pro-double-dip or anti-double-dip, signifies to me the volume of worry on the subject, and that in turn signifies to me that Consumer Confidence will continue to drop.
Can't you just imagine what people are saying right now over their July 4th BBQ's?
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