U.S. Economy: Soft Landing, Double Dip Recession, or 1937?

Last Updated Aug 5, 2011 2:59 PM EDT


The recent news on the economy, plus the implicit forecast made by the stock market this week, have people talking again of a second take for the Great Recession. I'm open to suggestions, and maybe next week I'll feel differently, but at this point there seems to be little hard evidence, and no more than optimism, pointing to anything other than a downturn.

On CBSNews.com: Ex-Obama adviser thinks chances of a double dip recession are 50-50
Upper-income consumers are spending a bit more, says the Gallup polling organization, $128 per day in July versus $119 a year ago (those numbers are self-reported and Gallup does not vouch for their accuracy). But for most of us, the middle and lower-income household group earning $90,000 or less, spending is down from a year ago, to $63 per day from $64. (For both groups, however, spending has increased, a little, pretty much each month this year.) Let's call it flat (although a lot more is going into the gas tank).

The business picture is not so good either. The global Purchasing Managers Index has been in retreat for several months, and most recently was reported by the Financial Times to be "at close to a standstill (sorry, no graph):"
Compiling individual data together, a global manufacturing PMI, sponsored by JPMorgan, fell from a level of 52.3 in June to 50.6 in July, its lowest level for two years. The level of the index suggested output growth was close to a standstill and the rebound in goods production had petered out as manufacturers continued to suffer from supply chain problems in the aftermath of the Japanese tsunami, high commodity prices, and austerity measures squeezing household incomes.
Joseph Lupton, global economist at JPMorgan, said: "Growth of the global manufacturing sector drifted closer to stagnation in July. Hopes of a near-term acceleration may have also been knocked by a slight retreat into contraction territory by the new orders index."
And of course unemployment is stubbornly high. This morning's report showed 154,000 jobs gained by the private sector, and 37,000 lost in government. That's positive but not keeping up.

So how close are we to a double dip? In The New York Times, Floyd Norris points out the similarities between today and the early 1980s.
In each case the first recession was caused in large part by a sudden withdrawal of credit from the economy. The recovery came when credit conditions recovered.
And in each case the second recession began at a time when the usual government policies to fight economic weakness were deemed unavailable. Then, the need to fight inflation ruled out an easier monetary policy. Now, the perceived need to reduce government spending rules out a more accommodating fiscal policy.
While the 1981 twin valleys are the recent precedent, let's not forget the most famous double-dip, namely the Great Depression. Roosevelt's Keynesian fiscal policies had turned the economy around by 1934, but Congress in 1937 insisted on cutbacks to government spending (sound familiar?), and measured annually, GDP fell back three percent in 1938. Not long after came the buildup to WWII and several years of growth in the high teens:


Thank you, Tea Party.

Back to Floyd Norris:
...[C]oncerns have grown that the essential problems that led to the 2007-09 recession were not solved, just as inflation remained high throughout the 1980 downturn. Housing prices have not recovered, and millions of Americans owe more in mortgage debt than their homes are worth. Extremely low interest rates helped to push up corporate profits, but companies have hired relatively few people.
But there's an important difference here. In the 1980s, the economy had gotten too hot, and government put on the policy brakes. In the recent case, everything deflated, and policy has been trying to put air back into the balloon.

It seems there's every reason, or at least many reasons, to expect another pause.

Will the stock market drop, through the "wealth effect," lead to lower confidence and spending? Probably.

We need jobs -- where are they going to come from? One traditional source of jobs has been from government spending, on roads and bridges and such, but you'll remember that the recent budget shakedown rules out much in the way of fiscal stimulus.

Another, far larger, source of jobs is businesses, but keep in mind corporate America is too timid to hire anyone, record corporate profits notwithstanding.

I'll let Floyd Norris wind it up:
Government stimulus programs historically have often appeared to be accomplishing little until the cumulative effect suddenly helps to power a self-sustaining recovery. This time, the best hope may be that the stimulus we have already had will prove to have been enough.
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