07 July 2010

Ten Paths to a 'Double-Dip' Recession

Kalamazoo Gazette

The recession is over and the U.S. economy is recovering, right?

Or, are we headed for another period of contraction, the so-called double-dip?

Well, according to Grand Valley State University economist Brian Long, the answer is still up in the air.

"Most everyone agrees that our current recovery is still somewhat fragile, and that it would not take very much to push us back into a recession," Long wrote today in a paper released with his monthly survey of West Michigan's industrial economy.

Long said if several of the 10 factors he identifies below were to converge, there would be a good chance of a new recession gripping the country.

"There is a possibility that several negative factors could converge to cause trouble," he said. "Hence, there is still about a 1-in-3 chance that our current recovery could be stopped. With each passing month of good statistics, these odds decline."

Below are Long's 10 factors that could cause a double-dip recession:

It's all in your mind

"First and foremost, the biggest cause for a double dip, if it occurs, may be that we have talked ourselves into it," Long said. "Given that all 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."

Consumers lack confidence
Long says the major consumer confidence indexes remain low as many people still haven't seen full recovery of their 401(k) plans and home values. "It may take years before home prices return to their 2006 valuations. Many people who took out second mortgages and home equity loans just a few years ago are now seeing the error of their ways, and have been forced to reduced their spending."

Show me the jobs

It may take about four or five years for the nation's unemployment rate, currently around 10 percent, to return to the 5 percent range, Long said. "In every post-war recession up until now, the unemployed eventually found new employment within a matter of a few months, especially in the industrial sector." But that's definitely not the case today. "In the case of unskilled industrial jobs in 2010 — they are simply gone, never to return."

What's your home worth?

The housing market is going to be screwed up for some time, Long said. "Even though there is considerable evidence that home prices have now stabilized, it may take as many as 20 or 30 years before home prices return to their 2005 levels in many parts of the country," Long said. That affects construction workers, banks and borrowers.

As certain as death
Long said he's not sure what impact "the expiration of the tax cuts at the end of this year" will have on companies' ability to hire, buy new equipment or expand. "The threat of higher taxes has put business executives in a pessimistic and cautious mood," he said.

New regulations?
New regulations on the financial industry and uncertainty surrounding the healthcare reform measures passed earlier this year also "dampens the enthusiasm for business expansion," Long said.

Trouble, over there

"Most of Western Europe, as well as the United States, have promised generous health care and pension provisions to retirees. These programs are not funded, except by current revenues. As the baby boom generation retires around the world, the smaller work force that remains will have to support them," Long said. This strain on government revenue — which recently played out in Greece — could trigger a new wave of panic over government defaults.

The BP effect
"The oil spill cannot be forgotten," Long said. The Gulf Coast states of Louisiana, Mississippi and Alabama "will feel the direct impact as oil workers are sent to the unemployment line" and tourism in the region takes a hit. If the disaster widens and regulations tighten on the oil industry, there could be an impact on the national economy.

Balancing the state budget

"Many states have chosen to balance their budget shortfalls by raising business taxes," Long said. "A significant increase in business taxes almost always has an adverse impact on the economy where the tax is levied."

Will we really ever be rid of it? "There is the ever-present fear of another terrorist attack," Long said. "Depending on the shape and form of this attack, it could result in a huge wave of fear that would shut down part of the economy. If the attack is serious enough, it could throw us into a recession by itself."

As depressing as that list is, remember that it's not all doom and gloom. Long is saying that one of these factors on its own isn't enough to take the economy back into recession. But several of these factors, worsening at the same time, could.

"If we were to get hit with several of these problems at the same time, it would make the situation even worse," Long said. "At this time the economy is sailing into a lot of headwind. However, with the strong numbers we are now reporting, it appears that we may very well be able to buck the tide."

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