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First-Ever Downgrade Begs Question: Double-Dip or a Blip? First-Ever Downgrade Begs Question: Double-Dip or a Blip?

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First-Ever Downgrade Begs Question: Double-Dip or a Blip?

A guide to recession fears.


(Photo illustration by Chet Susslin)

It is a sign of just how brutal this week was that the first-ever downgrade of U.S. bonds came as no surprise. The nation lost its top-notch AAA credit rating from Standard & Poor's, getting cut one step to AA-plus based on fears of growing U.S. budget deficits.

It was a week so awful that Friday's announcement of 117,000 new jobs in July felt like an achievement.


Many economists remain convinced that a so-called “double-dip” recession could be on the horizon, due to a sour turn in nearly every major economic indicator and a barrage of outside shocks to the U.S. recovery. Markets are showing their fear through major sell-offs, which swarmed stock exchanges around the world this week.

No question, it’s a scary time. How scary is less clear. Let’s break it down.

What are the chances the U.S. economy dips back into recession?


They vary by the forecaster, but the standard range right now seems to be between 25 and 50 percent. Leading the pessimistic crowd are economists Nouriel Roubini and Martin Feldstein, who both say there’s a better than even chance that the United States is headed for another recession. Other economists have been far more circumspect, especially in light of the Friday jobs numbers, which Ian Shepherdson, chief U.S. economist for High Frequency Economics, called “a long way from recession territory.”

The chief optimist isn’t an economist—he’s White House spokesman Jay Carney, who told reporters this week: “We do not believe that there is a threat there of a double-dip recession.”

What’s worrying (almost) everyone?

Signs of slowing growth that have spread across almost every sector of the economy, for starters. The Commerce Department reports that gross domestic product expansion was 1.3 percent in the second quarter and 0.4 percent in the first. Manufacturing and service-activity indexes are down. Consumer spending is falling. Housing prices and sales remain extremely weak. Government budget cuts are wiping out some of the private-sector job gains, including a 37,000-job drag in July.


External forces aren’t helping. High oil prices following the Middle East unrest have crimped consumer spending in non-energy areas. Europe’s ongoing debt crisis is rattling investors. Some analysts, such as the economists at MKM Partners, increasingly fear that the world’s current growth engine, China, is set for a cool-down.

Some of the scariest signs are buried in fine print. For example, the Labor Department said Friday that the U.S. employment-to-population ratio—the percentage of work-age Americans actually holding a job—fell to 58.1 percent in July. That’s the lowest level since 1983.

Any bright spots?

A couple. First, sagging expectations for growth appear to be pushing global oil prices to their lowest level since the dawn of the Arab Spring at the beginning of the year; the lower prices go, the better the chances that consumers step up their spending again.

Second, corporate profits remain high—and particularly high relative to the number of employees in the private sector. Translation: U.S. businesses are lean, and that helps.

As Deutsche Bank analysts explain, “Typically, profitability deteriorates dramatically before a recession. In fact, this is what helps bring about a downturn—companies reduce the size of their workforce in order to maintain profitability.… At the moment, corporate profitability is high and rising, in large part because companies have been hesitant to hire workers at a meaningful rate. This should mitigate some recession risk in the sense that companies are already thinly staffed relative to their profit levels.”

That's not great comfort to America's unemployed. But for this week, it counts as comfort, at least.

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