Factors for a double dip recession

July 12, 2010
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We continue to hear warnings of a double dip recession from various pundents, including some well known economists like Arthur Laffer. What are the odds? Probably something like 33 percent. Even though our recovery is now over a year old, it is still fragile. 

The biggest cause for a double dip, if it occurs, may be that we have talked ourselves into it, given that spending at both the consumer and industrial level is somewhat psychological, and with enough pessimism, it is possible to talk our way back into a recession. 

The second potential cause for a double dip is that the consumer sector is still not feeling positive. The major consumer confidence indexes remain low. Furthermore, the vast majority of the general public saw the value of their 401(k) only partially recover in value during 2009, and now the markets have had another setback.

Third, there is the constant stress of high unemployment. Almost all of the major forecasts project that it will take four or five years just to get the rate back down to 5-6 percent. In every post-war recession up until now, the unemployed found new employment within a matter of a few months, especially in the industrial sector. In the case of unskilled industrial jobs in 2010, they are simply gone. Hence, the percentage of people unemployed for over six months is now at the highest level since the 1930s. Adding to this is the notion that many people had to accept marginal jobs, i.e., they are underemployed. In the case of dual income families, one partner may have dropped out of the work force. Because of this, the real unemployment rate may be closer to 16 percent.

Fourth, there is the problem of the depressed housing market. Even though there is considerable evidence that home prices have now stabilized, it may take as many as 20 or 30 years for them to return to their 2005 levels in many parts of the country. Housing starts have fallen in half in the past three years, and many construction workers are out of work. Adding to all of this is the problem of some people being unable to sell their homes and move should they so desire. So-called “short sales” occur when people selling their homes find that they are forced to pay the difference, often in cash, between the amount of the home loan and the market selling price. One local realtor noted that about a third of all his sales require the sellers to bring cash to the closing just for the privilege of selling their homes. 

Fifth, we now know that the debt problem of Greece is a microcosm of many countries in the industrialized world. Most of Western Europe as well as the U.S. have promised generous health care and pension provisions to retirees. These programs are not funded, except by current revenues. As the baby boomer generation retires, the smaller work force that remains will have to support them. This message is finally starting to soak in around the world. If we are lucky, it could start a wave of fiscal austerity that could stabilize the long-term situation. If there is evidence that this austerity is starting to take hold for most of the PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain), then the current crisis may be over. However, this will not completely solve the long-term problem of vastly underfunded pensions and health care benefits for the European baby boomers.

Sixth, we are still unsure of the impact of the expiration of the tax cuts at the end of this year. This expiration will act like a de facto tax increase. Historically, most tax cuts have been followed by periods of expansion, and most tax increases have had the opposite effect. The degree to which this will occur in 2011 is still a subject of speculation. The threat of higher taxes has put business executives in a pessimistic and cautious mood. For some, it may take months before they begin hiring again, ordering new capital equipment and talking of expanding.

Seventh, is the cost of new regulation that will hit various industries, especially financial institutions. In addition, conformance to new environmental regulations plus the uncertainty of the new health care legislation dampens the enthusiasm for business expansion.

Eighth, many states have chosen to balance budget shortfalls by raising business taxes. A significant increase in business taxes almost always has an adverse impact on the economy where the tax is levied. Adding to this will be the cost of complying with various new regulations coming from Washington and some states.

Ninth, the oil spill cannot be forgotten. Louisiana, Mississippi and Alabama will feel the direct impact as oil workers are sent to the unemployment line or other parts of the world. The tourist trade has already taken a hit. Now a drilling moratorium is in place that could last for several months or longer. Longer term, the higher cost of drilling will restrict the industry.

Finally, there is the ever-present fear of another terrorist attack.

However, with the strong numbers now reported, it appears we may well be able to buck the tide. All of this confirms the forecast that the recovery remains on track, even though the pace may slow. But recovery is still recovery, and it sure beats the alternative.

Brian G. Long, CPM, is director, Supply Chain Management Research, Seidman College of Business, Grand Valley State University. 

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