The Double Dip Back On The Table

It has been a long time, at least as time has passed during the financial crisis, since economists regularly discussed the possibility of a double dip recession. The 2008 credit catastrophe is viewed as being in another age when banking was underregulated and consumers had infinite access to credit. The March 2009 market crash, much worse than the recent 30-minute one, was a dive from 12,000 to 6,700 which took barely half a year. The bad memory of that was largely blotted out as the DJIA raced to more than 11,300, a gain of almost 70% in a little over a year.
Economists began to say the recession was over earlier this year as it became clear that the fourth quarter of 2009 had been a good one financially. GDP figures for that quarter came in at the high-end of most experts’ expectations. The wrenching rise in unemployment began to ease about the same time. The prediction that the jobless rate would rise above 10% and stay there for several months never came true. The keystone of the recovery was corporate earnings which rebounded in both the fourth quarter of last year, and the first quarter of 2010. The improvement in the stock market so far this year has been driven very much by reports of improved profits and increased dividends. The run up in the stock market has benefited both individuals and corporations. The only “hold out” in the financial system improvement has been housing. The industry has remained stubbornly poor no matter how many billions of dollars the federal government been willing to throw at it.

The early stages of what appears to be a collapse of the euro and intractable problems with sovereign debt level in several European countries is a reminder of just how fragile the global, interdependent economy is. Last year, as the deficit of the US budget rose to uncomfortable levels, experts began to fear that the American Aaa credit rating might be at risk along with Britain’s. There was almost no mention of Greece, Spain, and Portugal because they were too small to matter. And, a cascading failure of the value of the sovereign paper of all three countries was outside the realm of possibility. The global capital markets had their eyes on debt issues in places like Japan. If the collapse of the global credit system had not created another year of recession, the default of a small country was hardly worth mentioning.
It only became clear recently that the deleveraging of national debt could be more dangerous to the global economy than the similar process in the bank system was. The worst part of the sovereign debt issue is that, unlike banks which can be regulated and forced to change practices, the rioters in the street of Greece are not easily contained.

The problems in Europe are now married to a growing list of problems in the US economy, many of them which looked as though they were getting better. The first two of these are the most obvious—housing and unemployment. As more people find jobs, more people have entered the work force which has kept the jobless rate high. The government has had to make provisions to support hundreds of thousands of people who have been out of work for a half-a-year, a year, or longer. Housing has not recovered an inch despite government incentives and low mortgage rates. That lack of recovery is almost completely due to unemployment. In a country where 17% of people are in some stage of joblessness, the number of homebuyers is bound to be historically low even if every home for sale is a bargain.

The European issue touches American almost instantly. The president has made the fair point that any sustainable recovery of the US economy will need a significant improvement of exports to support it. That, as much as anything else, is at the heart of the battle between US and China over how the yuan should be valued. The trade trouble has moved almost instantaneously from China to the EU. The drop in the euro will undermine the value of exports. Worse, a recession in Europe which could be triggered by rising taxes and austerity measures would badly hurt the demand for US goods and services.

At the beginning of the recession and then again as it ended, the problems that needed to be solved were largely due to housing, consumer leverage, and the rise of China as a powerful competitor for US goods and services. As it turned out, the real threat to a sustainable recovery, and the possible origin of a double dip recession was hiding in plain sight in Europe.

Douglas A. McIntyre