Reasons That Suggest A Double Dip Recession Could Occur

While double dip recessions are historically rare, the lack of pent up demand for houses and goods, along with high unemployment, may create the perfect conditions for another …

While double dip recessions are historically rare, the lack of pent up demand for houses and goods, along with high unemployment, may create the perfect conditions for another downturn. There is also concern over local government deficits that could result in hundreds of thousands of layoffs over two years. See the following article from HousingWire for more on this. 

The US economy appears to be “in trouble” as the effects of significant government stimulus are already wearing off, according to TrimTabs Investment Research commentary over the Independence Day weekend.

As stimulus effects fade, consumer demand recedes with it. And with unemployment figures still high, the economy looks to be in for continued distress in the back half of 2010.

TrimTabs CEO Charles Biderman and executive vice president David Santschi, in commentary Sunday, countered the idea that a double-dip recession is “highly unlikely” due to its historical rarity. A double dip occurred three times over the last 150 years, the firm noted, but each recovery was partly characterized by an influx of demand.

Biderman and Santschi said a recovery from the current recession will not be attributed to the government’s unprecedented stimulus policies, since no other economic recovery was sourced almost entirely by government stimulus. Historical recoveries benefited at least in part, they said, by pent-up demand for housing and other hard goods — purchases of which were constrained during times of recession.

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The current recession, however, resulted in stimulus efforts like the Obama Administration’s first-time homebuyer tax credit, which encouraged house purchases with tax credits of up to $8,000.

The deadline for qualifying home buyers to enter a sales contract passed at the end of April, and Obama last week signed an extension of the closing deadline to September 30, from the previous June 30 deadline. Despite the extension, pending home sales plummeted 30% in May after the contract deadline passed — indicating first-time buyer demand for houses may already have dried up.

The 30% drop in May followed a 6% jump a month earlier, according to research from outlook and commentary services firm Econoday:

“After the plunge in new home sales in May following the expiration of the sale deadline for the special homebuyer tax credit, it was no surprise that pending existing home sales also plummeted. But to many, the size was,” said Econoday senior economist Mark Rogers.

TrimTabs’ Biderman and Santschi wrote: “There is no pent-up demand for housing or other hard goods to source a lasting recovery.”

Unemployment and constrained wage growth further indicate the economy may be in hot water, according to TrimTabs. Based on tax withholdings, the firm estimates wages and salaries rose just 1.3% in June from a year earlier. At the same time, the Census Bureau laid off an estimated 243,000 temporary workers, weighing on an already underemployed labor force.

Things are likely to get worse in the economy in the second half of 2010, mainly due to unemployment and tax circumstances, TrimTabs said.

The firm noted that states and cities are likely to lay off hundreds of thousands of employees in the face of a $260bn budget deficit for the states in the next two fiscal years. Additionally, tax hikes in 2011 could discourage investment — and may even trigger waves of asset sales — in Q410, the firm said.

This article has been republished from HousingWire. You can also view this article at
HousingWire, a mortgage and real estate news site.


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