Why Risk Of A Double-Dip Recession Is Low

While Obama’s warning about a double-dip recession may have caused some worry, research of recessions dating back to the 1850’s indicate that double-dip recessions typically occur in extreme …

While Obama’s warning about a double-dip recession may have caused some worry, research of recessions dating back to the 1850’s indicate that double-dip recessions typically occur in extreme conditions, unlike the present economic environment. According to some experts, a slow recovery is the most likely scenario. See the following article from Money Morning for more on this.

In a warning that focuses on the need to contain the soaring federal deficit, U.S. President Barack Obama Wednesday said that a continued accumulation of government debt could be enough to blunt the recovery and then drop the U.S. economy into a “double-dip” recession.

It was President Obama’s most-severe warning yet about the dangers of growing budget deficits at a time when the U.S. unemployment rate is at 10.2% and climbing. The comments were made to Fox News during an interview granted in Beijing during the president’s nine-day trip through Asia.

“I think it is important, though, to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession,” President Obama told Fox News interviewer Major Garrett.

A “double-dip” recession occurs when an economy emerges from one downturn, only to sputter, stall and quickly drop back into another recession.

Challenge Facing Obama

The Obama administration faces the unenviable task of somehow transforming the nascent U.S. economic rebound into a full-blown and lasting economic recovery, while at the same time finding a way to engineer a long-term and lasting reduction in the nation’s massive budget deficits, analysts say.

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The budget deficit – and the damage the debt is inflicting on the U.S. dollar – is almost certain to be a topic of conversation when President Obama meets with China’s government leaders. President Obama was in Beijing as part of an Asian tour that was scheduled to address global economic challenges.

In a candid interview, President Obama said his administration is trying to balance the need to rev up the economy – without adding to the budget shortfalls created as the nation’s leaders try to “prime the pump” after one of the worst financial crises in history. The president said that he’s still considering additional tax incentives for businesses as a way of reversing the surging jobless rate.

“There may be some tax provisions that can encourage businesses to hire sooner rather than sitting on the sidelines. So we’re taking a look at those,” President Obama told Fox News.

Money Morning Sees Little “Double-Dip” Risk

In a news-analysis story published earlier this month, Money Morning Contributing Writer Jon Markman said that a new research report concluded that the odds of a double-dip recession occurring right now are very low. That means that a drop back into recessionary conditions looks less and less likely even as unemployment creeps higher and has crossed the 10% threshold for the first time in a quarter century.

Deutsche Bank AG (NYSE: DB) economists – who conducted the research – reviewed U.S. economic history all the way back to the 1850s, and found that double-dip recessions are exceedingly rare: There have only been three episodes in which the economy has fallen back into recession within a year of a previous recession ending. And that’s out of 33 recessions that have taken place since 1854.

Indeed, when these double-dip downturns do occur, they happen under circumstances quite different from today’s situation, Markman wrote.

Two of the three double-dips happened in the years prior to World War II – in 1913, and again in 1920. The more relevant example was the double-dip recession of the early 1980s, which was driven by the fight against double-digit inflation rates.

U.S. President Jimmy Carter imposed credit controls in March 1980, which resulted in a sharp but short-lived recession before the economy expanded again for 12 months. Then U.S. Federal Reserve Chairman Paul A. Volcker hiked short-term interest rates to 20% in the summer of 1981, as he pushed the economy back into recession while dealing a death blow to inflation.

With deflation just as likely as inflation at the moment, a repeat of the 1980s just isn’t in the cards, as the Fed is set to keep rates at very low levels until the end of 2010, Markman said.

In the leadoff story to its ongoing “Outlook 2010” economic-forecasting series which debuted this week, Money Morning concluded that the U.S. economy would dodge the double-dip downturn that has been the focus of so much fear since the Bush and Obama administrations launched their financial counterattacks on the worst financial crisis since the Great Depression.

However, Money Morning also found that economic forecasters are reluctant to predict a sharp economic rebound for 2010. In fact, as opposed to a classic “V-shaped” economic recovery that would accelerate as the year goes on, many economists are predicting that the rate of growth will slow as the New Year unfolds.

This article has been republished from Money Morning. You can also view this article at
Money Morning, an investment news and analysis site.

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