Friday, 5 August 2011

Double Dip Recession May Be Happening or Not

It has been three decades since the United States suffered a recession which followed on the heels of the previous one. But it can happen again. The unrelenting negative economic news over the past two weeks has a picture of an American economy that fell further and recovered less than we thought.

When eventually I might be called Great Depression hit the country, there was general political agreement that the role of government to fight back by stimulating the economy. It did, and the recession ended.

But Great Depression II if that's what we entered, led to a very different response. Now the politicians are squabbling over how much to cut. After months of wrangling, they went a bill aimed at forcing more spending reductions over the next decade.

If this is the beginning of a new double dip, the two important things in common with the twin recessions of 1980 and 1981-1982.

In any case, the first recession was caused in large part by a sudden withdrawal of credit in the economy. The recovery came when credit conditions restored.

And in any case, the second recession began at a time when the usual government policy to combat economic weakness were considered unavailable. Then, the need to combat inflation excludes a better monetary policy. Now, the perceived need to reduce public spending rules in a broader fiscal policies.

The U.S. economy fell into what was at first a fairly mild recession at the end of 2007. But the global downturn into a dive after the bankruptcy of Lehman Brothers in September 2008 led to the disappearance of credit for almost all borrowers are not as super-safe. Banks in the United States and other countries needed bailouts to survive.

The unavailability of credit causes a decline in world trade volumes of a magnitude not seen since the Great Depression, and almost every economy went into recession.

But it turned out that companies overstated. While sales to customers fell, they did not fall as much as the production did.

That fact set the stage for an economic upturn that began in mid 2009, the National Bureau of Economic Research, the arbiter of such things, determining that the recession ended in June of that year. Manufacturers around the world reported rapidly rising orders.

Until recently, most observers believed that the U.S. economy was in a slow recovery, albeit with a very disappointing job growth. The official figures for gross domestic product showed the U.S. economy grew to a record size in the last three months of 2010, which erased the loss of 4.1 percent in GDP from top to bottom.

Then last week the government announced its annual review of the numbers for the last few years. New government survey indicated Americans spent less than previously estimated in 2009 and 2010 on a wide range of things like food, clothing and computers. Tax returns showed the Americans, even cutting back on gambling. The recession now seems to have been deeper - a top-to-bottom decline of 5.1 percent - and the recovery is less impressive. The economy is still smaller than it was in 2007.

In June, more U.S. manufacturers that new orders fell than rose, according to a study by the Institute for Supply Management. The margin was small, but research had shown rising orders for 24 consecutive months. Manufacturers in most European countries, including Germany and Britain, also reported weaker new orders.

Back in 1980, a recession began when the government - despair of its failure to bring down rising inflation - invoked controls aimed at limiting the expansion of credit and make it more expensive for banks to lend. These controls proved much more effective than anyone expected, and the economy has tanked. In July, the credit checks were completed, and economic research later determined that the recession ended that month.

In the first quarter of 1981 the economy was larger than it was at the previous peak.

But little was done about inflation and the Federal Reserve was determined to kill the dragon. With high interest rates, home sales plunged in late 1981 to its lowest level since the government began collecting data in 1963. Now they are even lower.

There is, of course, no assurance that a new recession has begun or will do so soon, and a positive jobs report on Friday to revive some optimism. But concerns have grown that the essential problems that led to the 2007-09 recession were not resolved, as inflation remained high during the 1980 downturn. House prices have not recovered, and millions of Americans owe more mortgage than their homes are worth. Extremely low interest rates helped to push up corporate profits, but companies have hired relatively few people.

In all other cycles, the recent wave of bad economic news has resulted in politicians vie with each other for programs to revive growth to imagine. President Obama has called for more spending on infrastructure, but there seems little chance Congress will not take action. The focus in Washington is to decide where to reduce the expenditure does not increase.

There is some evidence that the Federal Reserve might be willing to continue buying bonds, which stopped in June, despite opposition from conservative members of Congress. But the revised economic data may indicate that the previous program - known as the QE2, for quantitative easing - even less impact than had been thought. With short-term interest rates near zero, monetary policy of the Fed's options are limited.

Government incentives programs traditionally often appeared to be accomplishing little until the cumulative effect suddenly helps power a self-sustaining recovery. This time, the best hope is that the stimulus that will prove we have had have been enough.


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