Double-Dip Recession After Oil Spill? Not So Fast

Last Updated May 5, 2010 9:56 AM EDT

The American economy has taken some hard, hard body blows over the past two years, and a major oil spill in the Gulf of Mexico can hardly help. But forecasts of its demise -- also known as a double-dip recession - are somewhat exaggerated.

David Kotok, chief investment offer of Cumberland Advisors is having an Andy Warhol moment thanks to a nicely timed publication of some nightmare scenarios for how the disaster of Deepwater Horizon could drive the economy into (another) recession.

The money quote about what Kotok calls the "ugliest" scenario:

This spew stoppage takes longer to reach a full closure; the subsequent cleanup may take a decade. The Gulf becomes a damaged sea for a generation. The oil slick leaks beyond the western Florida coast, enters the Gulfstream and reaches the eastern coast of the United States and beyond. Use your imagination for the rest of the damage. Monetary cost is now measured in the many hundreds of billions of dollars.
But let's not hit the "sell" button just yet.

This ultra-bearish outlook is based on some assumptions that are already not panning out. The weather has given cleanup crews a break by creating better conditions to contain the oil. Efforts to use chemicals to disperse the oil before it rises to the surface are working.

The currents may not take the oil onto East Coast beaches.

BP is about to launch an (admittedly unprecedented) effort to drop a containment dome over one of the leaking wells. And for a mixture of PR and financial reasons, BP has every incentive to move quickly and effectively here.

Also: The federal response is firing on all cylinders. That means money -- not exactly the additional stimulus package some hoped for, but nonetheless -- will flow to the Gulf and any other affected regions.

That's not money in the bank, but it's a far cry from an unchecked environmental catastrophe. Yes, folks, the system is working.

Kotok's analysis of the oil spill's potential impact also leaves out an emerging consensus among economists that the double-dip recession, which seemed a real possibility only six months ago, is much less likely. Don't expect the economy to contract outright. (If you're trying to find a job, you're probably screwed, but that's another matter.)

Bottom line: the oil spill could make a bad economic situation far worse. But don't bet on it just yet.

  • Carter Dougherty

    Carter Dougherty, a former economic correspondent for the International Herald Tribune and The New York Times, is fascinated by the intersection between policy and business, in the United States and abroad. He shared in a Loeb Award, business journalism's most prestigious, while at the NYT. But he still looks back fondly on his days trudging through central Africa, reporting on Congo, Darfur and other rough spots.