FacebookTwitterGoogle+RedditEmail

Why the Double-Dippers Are Wrong

The latest fad among economic forecasters is to talk about the growing probability of a double-dip recession. They have raised fears that the economy will again go spiraling downward at a point where it has hardly made up any of the ground lost in the last recession. This is indeed a scary prospect. However the data suggest that the double dip gang is off the mark in raising these fears.

Before reviewing the evidence it is important to remember who these economic forecasters are. Economic forecasters are not workers like dishwashers and cab drivers who are held accountable for the quality of their work. They can be wrong every day about everything and face little risk to their career prospects.

Go back to 2006 or 2007 and see what your most widely quoted forecasters had to say about the economy. Almost none of them noticed the $8 trillion housing bubble that was on the verge of collapsing and wrecking the economy. With very few exceptions, the word from the forecasters was that we had clear skies ahead.

If you thought that missing the biggest downturn in 80 years would be a strike against your record, then you don’t understand economic forecasting. There is no reason to believe that forecasters are any more knowledgeable about the economy today than they were four or five years ago.

A recession means that the economy is actually shrinking. Generally the economy has gone into recession when the Fed raised interest rates to slow the economy in order to bring down inflation. The normal story is that higher interest rates lead to reduced purchases of interest sensitive items, most importantly cars and houses. Most post-war recessions were kicked off when car sales and house sales and new construction plummeted.

There seems to be little risk of a substantial decline in either car sales or house sales and construction, primarily because the levels are already so low. Car sales are currently running at a bit below a 13 million annual rate. By comparison, they averaged well over 16 million annually in the years before the recession.

It’s difficult to envision the sort of big dip in sales that can tip off a recession. Car sales are not likely to fall below a 10 million annual pace.

It is the same story with housing. In the years leading up to the crash, the country was building close to 1.9 million housing units a year. In recent months we have been building homes at less than a 600,000 annual rate. How much lower would anyone think this number could go?

In short, we simply don’t have the basis for the typical recession in the post-World War II era. Both car sales and housing construction are already so low that they don’t have much room to fall.

Looking at the other categories of GDP, it is difficult to see the basis for the negative growth implied by a recession. Consumption of course is the biggest part of the story, comprising 70 percent of GDP. We have seen slow growth in consumption through the first half of 2011 and it is difficult to see why that would not continue. The economy added 117,000 jobs in July. This is weak, but nonetheless positive.

Wages are roughly keeping pace with inflation. They fell behind a bit in the first half of 2011 because of the surge in energy prices; however, with energy prices falling in the last two months, workers will see some boost to their real wage in the second half of 2011.

Equipment and software investment has been growing at a rate of between 5-10 percent. Since orders are typically made well in advance of actual investment, there is no evidence in the order data that suggests this number will turn negative. The government sector is shrinking, but only at a 1.0-2.0 percent annual rate for a sector that comprises 20 percent of GDP.

In short, looking at the issue more closely, it is hard to construct the double-dip story. The one exception would be if a collapse of the euro led to a Lehman-type financial freeze-up. However, this would require a degree of blundering that would be difficult to envision even from the European Central Bank.

However, the fact that a double-dip is not likely does not mean that we have good economic news on the horizon. All the signs point to several years of weak growth. At best the economy is growing at the 2.5 percent rate needed to keep pace with the growth of the labor force, and it may be growing more slowly. This would mean that the unemployment rate will rise from its current 9.1 percent rate.

This is in fact a truly awful picture. After severe downturns in the 70s and 80s the economy came roaring back, growing at 7-8 percent annual rates in peak quarters. This is the sort of growth that is necessary to quickly bring the unemployment rate down to more tolerable levels.

Unfortunately, these sorts of growth rates are nowhere on the horizon. This is why the double-dip story is so pernicious. If a double-dip is treated as a realistic scenario then even the slow growth that we are likely to see looks good by comparison. Instead of being outraged over our leaders’ failure to produce respectable growth we end up applauding them for avoiding a recession.

We can’t allow the bar for success to be set ridiculously low. We need real growth; avoiding a double-dip is nothing to brag about.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of False Profits: Recovering from the Bubble Economy . He also has a blog, ” Beat the Press ,” where he discusses the media’s coverage of economic issues.

This article originally appeared on Al Jazeera.http://english.aljazeera.net/

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

Weekend Edition
August 17, 2018
Friday - Sunday
Daniel Wolff
The Aretha Dialogue
Nick Pemberton
Donald Trump and the Rise of Patriotism 
Joseph Natoli
First Amendment Rights and the Court of Popular Opinion
Andrew Levine
Midterms 2018: What’s There to Hope For?
Robert Hunziker
Hothouse Earth
Jeffrey St. Clair
Roaming Charges: Running Out of Fools
Ajamu Baraka
Opposing Bipartisan Warmongering is Defending Human Rights of the Poor and Working Class
Paul Street
Corporate Media: the Enemy of the People
David Macaray
Trump and the Sex Tape
CJ Hopkins
Where Have All the Nazis Gone?
Daniel Falcone
The Future of NATO: an Interview With Richard Falk
Cesar Chelala
The Historic Responsibility of the Catholic Church
Ron Jacobs
The Barbarism of US Immigration Policy
Kenneth Surin
In Shanghai
William Camacaro - Frederick B. Mills
The Military Option Against Venezuela in the “Year of the Americas”
Nancy Kurshan
The Whole World Was Watching: Chicago ’68, Revisited
Robert Fantina
Yemeni and Palestinian Children
Alexandra Isfahani-Hammond
Orcas and Other-Than-Human Grief
Shoshana Fine – Thomas Lindemann
Migrants Deaths: European Democracies and the Right to Not Protect?
Paul Edwards
Totally Irrusianal
Thomas Knapp
Murphy’s Law: Big Tech Must Serve as Censorship Subcontractors
Mark Ashwill
More Demons Unleashed After Fulbright University Vietnam Official Drops Rhetorical Bombshells
Ralph Nader
Going Fundamental Eludes Congressional Progressives
Hans-Armin Ohlmann
My Longest Day: How World War II Ended for My Family
Matthew Funke
The Nordic Countries Aren’t Socialist
Daniel Warner
Tiger Woods, Donald Trump and Crime and Punishment
Dave Lindorff
Mainstream Media Hypocrisy on Display
Jeff Cohen
Democrats Gather in Chicago: Elite Party or Party of the People?
Victor Grossman
Stand Up With New Hope in Germany?
Christopher Brauchli
A Family Affair
Jill Richardson
Profiting From Poison
Patrick Bobilin
Moving the Margins
Alison Barros
Dear White American
Celia Bottger
If Ireland Can Reject Fossil Fuels, Your Town Can Too
Ian Scott Horst
Less Voting, More Revolution
Peter Certo
Trump Snubbed McCain, Then the Media Snubbed the Rest of Us
Dan Ritzman
Drilling ANWR: One of Our Last Links to the Wild World is in Danger
Brandon Do
The World and Palestine, Palestine and the World
Chris Wright
An Updated and Improved Marxism
Daryan Rezazad
Iran and the Doomsday Machine
Patrick Bond
Africa’s Pioneering Marxist Political Economist, Samir Amin (1931-2018)
Louis Proyect
Memoir From the Underground
Binoy Kampmark
Meaningless Titles and Liveable Cities: Melbourne Loses to Vienna
Andrew Stewart
Blackkklansman: Spike Lee Delivers a Masterpiece
Elizabeth Lennard
Alan Chadwick in the Budding Grove: Story Summary for a Documentary Film
FacebookTwitterGoogle+RedditEmail