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A Second Downturn Would Be Different--If It Happens A Second Downturn Would Be Different--If It Happens

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A Second Downturn Would Be Different--If It Happens

August 5, 2011

If the country is, in fact, heading into a double-dip recession, it wouldn’t be the first time. The deep recession of the early 1980s was a classic example of a “W” shaped downturn. The economy shrank 8 percent from January to July of 1980, then grew briefly and got clobbered again from July 1981 to November 1982. 

But if there is double-dip, analysts say that the second downturn will be different from the first one in several ways.  

*It’s likely to be milder, more of a correction than a crash, if only because the United States won’t be bouncing back from any overheating.   


*Housing won’t be the problem. There’s no reason to think that home prices and home-building are about to rebound. But they have both fallen so far already that they can’t go much further down. Housing won’t be a solution to the nation’s woes, but it won’t be the cause of them, either. 

*Manufacturing may not shed many jobs. Manufacturing is being pulled along by exports, and the big sources of foreign demand in Asia, Brazil, and a few other hot spots remain fairly strong.  Somewhat like housing, moreover, U.S. manufacturing employment had been knocked down so far that it is actually poised to keep adding jobs. U.S. factories actually added 24,000 jobs in July. 

*The big danger this time around is consumer spending, which has been the locomotive of the U.S. economy for decades. Consumer spending accounts for two-thirds of economic activity, and there is a long list of reasons why it is likely to remain weak even if the economy doesn’t take a new dive. If it does, retailers and a wide array of service providers will be feeling a lot of pain. 

History and current economic data suggest that the chances of a knock-on downturn are fairly high – maybe not as high as 50-50, but high enough to be a real possibility. 

Bank of America reckoned on Thursday reckoned that the risks of a double-dip recession had climbed to about 35 percent, mainly because the U.S. economy is too weak to absorb any more shocks. Economic forecasters have an absolutely execrable record of predicting recessions before they happen; the vast majority of experts, including those at the Federal Reserve, don’t see it coming until it has already arrived. 

In fact, private forecasters generally didn’t see the current swoon, either. In May, the Philadelphia Fed’s quarterly survey of professional forecasters predicted, on average, that the economy would expand by 2.7 percent in the second quarter (and they were in the middle of the second quarter when they predicted that). Last week, the government estimated that growth was only 1.3 percent and it revised its estimate of growth in the first quarter down to 0.4 percent – zero, for practical purposes. 

The core of the economy’s problem is stagnating personal income and consumer spending, which is largely – but not entirely – a reflection of persistently high unemployment.   


According to the Commerce Department, personal income growth has been slumping every month since the start of this year. Personal income climbed .5 percent, month over month, in February. In the months that followed, that growth slipped to .4 percent, .2 percent, and finally 1 percent in June. 

Consumer spending slumped even more – much more.  After climbing .8 percent in February over the month before, the growth fizzled steadily all spring and then actually declined by .2 percent – the first serious decline in two years – in June. 

Unemployment and insecurity about unemployment are probably the main reasons for that decline.  The problem isn’t just the high level of joblessness. It’s also the duration of joblessness. The share of unemployed people who have been out of work for more than six months is now 43 percent, the highest level since the government began keeping track in 1948. The longer people are out of work, the more they deplete whatever savings they had. Belt-tightening becomes austerity, or something worse. 

But analysts say that consumers face other obstacles. The Great Recession wasn’t just the deepest downturn since the 1930s. It was also the first “balance-sheet recession” the country has experienced, at least in modern times. The housing collapse wiped out trillions of dollars in personal wealth, and it did so after a prolonged period of overspending and overborrowing that had already left many if not most Americans unprepared for retirement.   

Economists estimate that, on average, people reduce their spending by about 6 cents for every dollar of wealth they lose. But Americans, especially baby boomers, have been forced to play a double game of catch-up: first to recoup their losses from the housing bust, and then to make up for previous under-saving for retirement. And even if they want to splurge, it has become harder to do so: credit is still tighter, despite low interest rates.

Add it all up, and it’s hard to see how consumer spending will again be the engine of growth. 

The outlook is better in other areas, notably housing. Housing prices, as measured by Standard &Poor’s Case-Shiller index of 20 major cities, are down almost one-third from their peak. They could go lower, and they may, but not by much.  

“Housing has been so depressed, it can’t go down further,” said Lawrence Yun, chief economist for the National Association of Realtors. “If we have a double-dip recession, hopefully not, but if we do have it, the recovery is probably going to take much longer for the housing sector.” 

But Yun said that the housing market is far more attentive to the job-creation numbers than the rise and fall of the stock market. Given that, Friday’s better-than-expected jobs numbers (117,000 net new jobs and a slight drop in the unemployment rate to 9.1 percent) are more important to the sector than the 512-point loss of the Dow Jones industrial average on Thursday. 

The problem with the real-estate slump, however, is that the housing sector also is the biggest driver of growth. “Increased sales of cars, furniture, of carpeting, household appliances, and houses are parts of the economy that proportionately are increasing in size faster,” said Gary Burtless, an economist with the Brookings Institution. “That’s just completely missing. You might say it’s the dog that didn’t bark. We’ve been looking for the dog to bark.” 

The manufacturing sector also has seen some modest improvements over the last several years that aren’t in danger of disappearing immediately. “Manufacturing is one of the brighter spots, but everything is relative,” said National Association of Manufacturers economist Chad Moutray. “Manufacturing was one of the hardest hit during the recession. We lost about 2.3 million jobs during the recession. We’ve gained 289,000 back since December 2009.” 

Moutray said that manufacturers are more positive about the next six months than they are about the current economic situation, but that could change easily. “There is an expectation that new orders are going to be picking up. Potentially employment will pick up.” 

Like everything else, however, any downturn in the broader global economy could change that. If Europe’s debt crisis truly spreads to big countries like Italy and Spain, and then drains energy from core countries like Germany and France, all bets are off. 

The resolution to the debt-ceiling crisis may have averted jitters in the United States, but the hangover still lingers. “The problem with the debt-ceiling resolution is not in the short run. It has taken away from the federal government the potential to do something that really lessened the risk to the economy from 2008 to 2010,” Burtless said. “Certainly a substantial size of the heavy lifting was done through fiscal policy [during the recession]. Now we’ve said, ‘You can’t do any of those things.’ ”

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