Double Dip Recession?

I realize that this is a lower than 50/50 probability, but the data this week has me thinking that, unless something ‘turns up’ we could be in for a nasty surprise sometime next spring. We may get a couple more quarters of contraction. And as we all now know two quarters of GDP contraction is a recession. So are we in for a ‘double dip’?

Here’s the data:

1. All the signs now point to a recovery in manufacturing. The ISM index on Monday rose close to the mythic 50% level that indicates expansion in manufacturing. Today we learn that inventories are still declining slightly – after ten straight months of decline – so there has to be a turn around in inventory levels soon else the stores and factories will be entirely empty.
2. This inventory recovery is a very typical factor in driving an economy out of recession because as businesses crank up production to restock they need to re-hire workers. that sets in motion a ripple effect – the newly re-hired workers can now buy stuff, that boosts demand, that depletes inventories, which requires even more restocking. And so it goes.
3. But. The big point to remember is that ‘re-hiring’. Without it the engine sputters to a halt once more, and after the initial euphoria of recovery the economy gets that sinking feeling. You know: the kind of feeling you get when you miss a step and you realize there’s no firm ground right where you imagined a solid footing.
4. Which brings us to the employment news: ADP reports today that payrolls are still shrinking at over 300,000 a month. the good news is that this rate of job loss is nowhere near as catastrophic as it was last summer. The bad news is that the backlog of people needing a job is now enormous – long term unemployment, defined as people looking for a job for more than twenty-six weeks, is now at a level unseen since the Great Depression. This, to be blunt, is not good.
5. Why? Because consumers are so battered they are not spending. They are saving. And without consumption coming back any hope of sustaining a recovery gets really remote. Yes we need consumers to repair their balance sheets so they feel financially secure – rotten home values have knocked the stuffing out of household wealth, and the stock market has rubbed salt in the wound – but we need them to spend enough to get the engine running smoothly. So all eyes are on consumption.
6. Meanwhile, lower mortgage rates, and those ‘rotten’ home values, seem to have enticed some buyers back into the housing market. Mortgage applications are rising slightly. That tells me the bottom of the housing market may be in sight. Unless this turns out to be a false dawn: to keep the market humming we need plenty of nicely employed buyers.
7. Which brings us back to jobs. Without a turn in the jobs market we run the risk of our incipient recovery running out of gas early next year.
8. Ergo ‘double dip’.

It’s an easy story to piece together based upon current data. All the joy at the recovery in manufacturing means nothing unless it produces jobs. The manufacturing sector is much smaller than it used to be and its ability to be a driver is diminished – we may simply end up re-hiring in our ‘off-shored’ facilities. Which is great for profits but not for the economy at large. Non-manufacturing is where the action needs to be, and with banking in a self-inflicted stupor – except for the traders making millions – getting much action there may be too big a task.

Oh, and by the way, don’t go around saying it’s up to small business either: a recent report shows that the mythological power of American small business – as the true all-American centerpiece of capitalism – is just that. A myth. Apparently we have less of a small business sector than most other industrial countries. We rely on big employers. And they’re all to busy cutting costs and off-shoring.

Whoops.

So is this double dip scenario likely? Less than 50/50. But we had better see a uptick in hiring this year or else those odds shorten dramatically early next.

Addendum:

One more thing: with approximately 15 million households having their mortgage ‘under water’ – the value of the mortgage is more than the value of the house – the chilling effect of the drop in home prices will roll on for a long time. Think about that: there are millions of people who cannot relocate to get a better job, or who cannot move to a larger home to accommodate a growing family, because in order to make such a move they’d have to take a loss on their home. Not just a ‘paper loss’ such as that taken by a long term home owner who bought a home years ago at pre-bubble prices, but an actual cash loss.

This is the kind of problem that works behind the scenes to corrode the outlook. It chips away at confidence and fuels the need to switch from consumption to savings.

From an aggregate point of view we have to locate a factor that will offset something like this. Will it be a boom in manufacturing? I don’t see that. Construction? Nope: we still have an overhang of unsold homes. Exports? No again: to whom will we export – they are all in the same boat we are. Business investment? Unlikely if they see that consumption isn’t coming back strongly. What then?

Government spending. Another stimulus. Think about it.