When most people hear the term “double dip,” their mouths start watering. Thoughts of some sort of confectionery ice cream/pastry concoction topped with generous helpings of chocolate and strawberry syrup finalized by heaps of glowing red cherries probably fill your mind. Unfortunately, we’re referring to the kind of double-dipping that involves everyone you know fearing for their life’s savings and their jobs.
Yes, it’s the dreaded “Double Dip Recession.” While doom and gloom experts like to point to the growing probability of the U.S. dipping back into a second recession, other experts are contradicting them by saying the economy has shown enough growth to avoid those pitfalls. According to the National Bureau of Economic Research, the deepest and longest recession the U.S. endured since the Great Depression officially ended in June 2009, spanning 18 months since its start in December 2007. So one recession is over, are we ready for another one?
Who should you believe? To figure that out, you first have to know what a double dip recession is and why it occurs.
What Is A Double Dip Recession?
The last U.S. double dip recession happened in the early 1980s. The one positive derived from that is, well, we’re all still here. In fact, the economy enjoyed some robust growth periods since then, too. So before you start stockpiling canned goods, guns and gold in your bunker, just remember that even if a double dip recession were to hit, it’s not the end of the world.
In any case, a double dip recession, also known as a W-shaped recession, gets its name from the fact that an economy recovering from negative GDP growth will “dip” back into a recession after experiencing a short period of growth.
In the 1980s, the double dip was caused by a combination of a high unemployment rate and the Federal Reserve raising interest rates to curtail runaway inflation. If you’re wondering why your savings rates are so low, it’s because the Fed doesn’t want the economy to slide back down during its recovery.
Will the U.S. Economy Double Dip?
It’s hard to say definitively at the moment, but there are undeniable factors that could pull the economy back into a recession. According to the NBER, a recession is defined as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real Gross Domestic Product, real income, employment, industrial production, and wholesale-retail sales.”
The NBER, a non-partisan, non-profit research organization, is widely considered the de-facto authority on when recessions officially begin and end. However, by using a subjective definition such as this, it usually creates a rift between experts with who use differing criteria to argue their own points. Since the NBER prefers accuracy over speed, the organization usually doesn’t declare recessions and recoveries until months or even years later. So officially, we might not even be at risk of a double dip because we haven’t recovered from the first recession yet.
Here are a few economic indicators you should keep your eye on to gauge the risk of a double dip recession:
- Unemployment: Over 8 million Americans lost their jobs since the start of the recession and the unemployment rate is still hovering around 10 percent. Until that number comes down, the threat is still very much real.
- GDP: Basically measures the health of a nation’s economy. Though the NBER doesn’t use this as a gauge, a general rule of thumb is a recession occurs when two consecutive quarters of negative GDP growth occur. That basically means GDP growth is a negative number, which contradicts the word “growth.” For the last four quarters, the U.S. economy has seen positive GDP growth, though it’s definitely slowing again.
- Stock market: Stock returns are usually leading indicators of how the economy should perform six to 10 months from now. The reason is because large investors usually try to get a head start on news before the reality is actually factored into businesses and the economy.
- Consumer Price Index: Basically, it tells you how much consumers are paying for goods. Large upswings mean goods are getting more expensive (inflation), and large swings down mean things are getting cheaper (deflation).
- The Federal Reserve: We discussed earlier how the Fed changes interest rates to stave off recessions, but they have other tools, too. There is talk about the Fed increasing the money supply by buying more U.S. debt to keep recessionary pressure at bay.
There are many indicators that someone following the economy can use–such as housing data, personal income growth, gold and commodities prices, etc.–but these are just basic ones that you probably hear the most on the news.
So are you worried about a double dip recession? How have you been paying attention to the economy’s recovery so far?
