One Lump or Two?

Will the United States suffer a “double-dip” recession?

In the past month, several unfortunate phrases have joined the lexicon, including “top kill,” “Gore divorce,” and “double-dip recession.” On the May 21 Today show, CNBC’s volatile James Cramer increased his odds of the econo­my suffering a relapse from 25 percent to 35 percent. At a mid-May investment conference, Robert Arnott, chairman of money manager Research Affiliates, predicted that “there’s a better than 50 percent chance that we will see a second dip in the economy.” Google searches for “double-dip” have spiked.

And why not? GDP grew at a 3 percent rate in the first quarter, down sharply from 5.6 percent in the 2009 fourth quarter. The Conference Board Leading Economic Index (LEI) fell in April by 0.1 percent, the first downturn since March 2009. The debt crisis that began in Athens is threatening to tear the euro zone asunder. (Beware of Greeks bearing rifts!)

But if you want a double dip this summer, you’ll have to go to Carvel. “The scenario in which there is a double dip is fairly remote,” says Joel Prakken, managing director and cofounder of Macroeconomic Advisers, the St. Louis–based consulting firm. “I just can’t really see it happening unless there is an extreme crisis of confidence.”

To a degree, the crisis of confidence that began in the summer of 2008 has never really ended. And that accounts for some of the concern about a double dip. Every time we see a punk housing number, a European government wobbling, or a sickening 1,000-point flash crash on Wall Street, our minds fly back to September 2008—and we imagine the worst.

The tapering off of GDP growth is natural as recoveries mature. We live in an age of long expansions—the previous two have lasted 120 and 92 months, respectively. But a chart showing quarterly GDP growth presents more of a sawtooth pattern than steady upward growth. “You always have a spurt in growth out of recession and then you throttle back,” says Lakshman Achuthan, managing director of the New York–based Economic Cycle Research Institute, which specializes in the internal dynamics of business cycles. ECRI’s long leading indicators, says Achuthan, show a decline in the growth rate. “But we’d need to see a pronounced, pervasive, and persistent decline in the level of the leading indicators to start talking about recession risk.”

The double dip: good in ice cream, bad in the economy

Ken Goldstein, economist at the Conference Board, which publishes the LEI, concurs. Yes, the index, whose components include unemployment claims, building permits, stock prices, and the average workweek, fell in April. But that’s coming off a very strong 1.2 percent gain in March. And Goldstein sees the moderating pace of growth as a bullish sign; a look inside the index shows the recovery is broadening from the industrial sector into the larger service sector. Rather than giving weight to financial markets—which, he jokes, have forecast 10 of the last two recessions—well-informed consumers should pay attention to jobs and consumer-spending data. “For a double dip to happen, you’d need a steady drumbeat back down in labor markets and consumer markets—a minimum of three months.”

In 2008 we learned that unexpected shocks can stun the economy into dead calm. Joel Prakken of Macroeconomic Advisers says Europe’s banking and sovereign-debt woes could wash up on U.S. shores in the form of falling exports and a strengthening dollar. But they only have the ability to cut into growth in the coming year, not to derail it. Marcoeonomic Advisers is forecasting growth of 3.7 percent for both 2010 and 2011.

The concern about a double dip is largely a function of what I’d call residual bearishness. Stung by excessive optimism in 2007, the econo-pundit community remains in a reflexive, dour crouch. Since this recovery began in the spring of 2009, it has been widely disbelieved and dismissed. Fretting about the double dip is as much about where we’ve been as where we are.

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