Is the U.S. Headed for a Double-Dip Recession?

The economy may well be able to continue growing and avoid another slump, but the recovery is unlikely to gain much momentum in 2013.

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Victor J. Blue / Bloomberg / Getty Images

Job seeker Julia Gilgurd, center, waits in line to enter a Choice Career Fair in New York City, July 18, 2012.

In addition to a host of warnings, last Wednesday’s Congressional Budget Office report did contain a little bit of good news. The economy will grow slightly faster in the second half of 2012 than in the first half, and inflation will stay extremely low, according to projections in the CBO’s Update to the Budget and Economic Outlook. The bad news is that unemployment will probably remain above 8%. The worse news is that next year the U.S. faces continued high unemployment, below-average growth and the risk of a double-dip recession.

The U.S. economy never built up much of a head of steam coming out of the 2007-09 recession, which saw the biggest drop in real GDP since the 1940s and the highest unemployment since the early 1980s. Historically, after such a major downturn ends, there’s typically a powerful rebound in which real GDP growth averages more than 4.5% annually over a period of two or three years and briefly hits annualized rates above 9%. By contrast, during the recovery that began in 2009, the economy has never grown faster than 4.5% and has averaged about 2.2% a year.

And next year, the global economic situation figures to be even less hospitable to growth, which will make it harder for the U.S. economy to speed up from its current disappointing pace. Indeed, last week the ratings agency Standard & Poor’s released a report saying that the chances of a recession in the U.S. in 2013 had increased to 25%, up from 20% in February. A U.S. recession is by no means inevitable, but the domestic economy faces three large hurdles, any one of which could mean the difference between steady growth and another economic contraction.

(MORE: The Six Daunting Financial Problems Facing America)

The fiscal cliff. Under current law, a variety of tax increases and spending cuts are scheduled to go into effect next year, with serious consequences. On the plus side, these measures would cut the deficit by more than $500 billion. The Federal debt, as a percentage of GDP, would slowly begin to shrink. All that deficit reduction, however, would come at the price of a likely reduction in the economy’s output of more than two percentage points, resulting in a mild-to-moderate recession. That’s just one of the reasons why these policies aren’t likely to go into effect as they stand. A gridlocked Congress and a closely-contested Presidential election make any sort of legislative action unlikely before November. But neither party wants to allow tax cuts to expire for the middle-class or to see more people get hit with the alternative minimum tax. And while the parties disagree on reductions in defense spending and Medicare payments to doctors, the cuts currently scheduled are so large that they will probably be modified or delayed. Historically, Congress has been very good at avoiding big middle-class tax increases and sudden, disruptive spending cuts. While the fiscal cliff may not be eliminated entirely, odds are it will be greatly reduced – even if only at the last possible moment.

The global slowdown. While the U.S. economy is growing, albeit somewhat sluggishly, growth around the rest of the world is slowing. Several European countries are already in recession, and the continent as a whole is heading in that direction. Indeed, recent figures show that the private sector in the euro zone has been contracting for seven months. Even Germany’s economy is losing momentum, and current trends indicate that real GDP for the overall euro zone could fall by half a percentage point in the current quarter. Moreover, if there is some sort of euro currency crisis, the resulting shocks to major European banks could turn a minor slowdown into a severe and possibly worldwide recession. In addition, the U.K. has been in recession since late 2011. And some booming economies in the rest of the world – like China and Brazil – are looking at significantly slower growth, dashing the hopes of some that growth in newly advanced economies would blunt the impact of a recession in the developed world.

(MORE: As the Fiscal Cliff Nears, Will Anyone Swerve?)

The stimulus shortfall. Ordinarily, in a situation like this the Federal government would try to rev up the U.S. economy with fiscal and monetary stimulus. Only trouble is, the emergency fuel tank is empty. Over the past 12 years, taxes have been cut and kept low, government spending has ratcheted up, the Federal Reserve has cut short-term interest rates to a minimum and has even taken to stoking the money supply through a process known as quantitative easing (which amounts to creating money by purchasing government bonds). With yearly deficits topping $1 trillion, there is little appetite in Washington for further fiscal stimulus, either through tax cuts or spending. On the monetary side of things, the Fed can’t push interest rates much lower, and the impact of another round of quantitative easing is unlikely to last any longer than the effects of the previous two rounds.

None of this means that a U.S. recession is inevitable. Sure, a mild slump in Europe, combined with slower growth in places like China, would affect U.S. multinationals that sell a lot overseas. And a financial crisis in the euro zone would doubtless hurt U.S. banks to some extent. But U.S. GDP growth depends largely on domestic factors, and there is still time for Congress to resolve the looming fiscal-cliff issues in a way that prevents a sudden shock to the economy and reduces the risk of another recession.

(MORE: Why Voters Don’t Blame Obama for the Slow Economy)

But while the private and public sectors in the U.S. have the wherewithal to avoid contracting GDP, that doesn’t mean that we’ll see the kind of growth that will put a serious dent in the unemployment rate. Even under the CBO’s optimistic scenario, real-GDP growth will pick up only from 1.75% at an annual rate to 2.25% later this year, and average 1.7% in 2013. Having failed to rebound when the weather was more favorable, the U.S. economy is hardly likely to do any better as storm clouds start rolling in.

20 comments
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08repsolBlade
08repsolBlade

Keep Up The Good Work Obama. My Divider In Chief!

Lets see if we can get the other half of the nation unemployed when you get re-elected.

18235
18235

the liberal media is doing good----nobody in the liberal media is crying poverty.

katie couric still making millions...movie tickets at 15 dollars for 3-d junk....lady gag gag making millions....magazines being sold at five dollars an issue.

no wonder the media loves obama.

Gary McCray
Gary McCray

All this garbage about double dip recessions, as if the economy is somehow an entity unto itself where historic data predicts future consequences regardless of external events.

Wake up, lots of things are going from bad to worse.

Insane short term corporate greed, global warming, oil, American, Chinese and European economy, rising costs of services and goods, reduced incomes, the housing debacle, the bank debacle and political partisanship at the expense of serving the people or the country.

This is the beginning of "Collapse", total, complete, collapse.

Afterwards maybe we can do something better.

18235
18235

you forgot to mention 20 million spanish speaking illegal aliens.

a lot of citizens would now like to have the jobs---and housing, including entire neighborhoods---that went to 20 million spanish speaking illegal aliens.

IonOtter
IonOtter

If we can re-elect Obama and flush the teapublicans down the drain, we *might* have a chance at pulling out of the nosedive.  If we can flush the supreme court justices too, then we'll have a good chance of reversing Citizen's United and restore the rule of law, rather than the rule of gold.

08repsolBlade
08repsolBlade

We hate each other and we need a 2nd Civil War. We are spoiled and the tree of liberty needs refreshing.

18235
18235

obama had four years----and he spent those four years giving 500 million dollars to some california solar energy scam, helping illegal aliens get jobs, and making gays happy with his re-election only pro-gay talk.

obama was never concerned about jobs.

YOU DIDNT BUILD THAT!

Doubting_Tomas
Doubting_Tomas

Comparisons with earlier recessions should break down employment between the public and private sector over the relevant periods.  Without that, it is a superficial apples and oranges comparison that only begs that question.

As for the fiscal cliff, expect a repeat of the political posturing on the national debt ceiling and the threat of further credit rating downgrades.

Mary Waterton
Mary Waterton

Another recession??? We never came out of the last one! Oh sure, we borrowed and spent TRILLION, inflated our currency, bailed out unions, bailed out banks, etc, etc, etc. Those people are doing just fine. 

It's the rest of us who are still stuck in the recession. The 1 in 7 people living on food stamps, unemployed, and not being counted as unemployed.

zza371creek
zza371creek

I don't know where they got the facts on GDP growth. After the 2001 recession the GDP did hardly grew.

In fact since 2000 we have only had 1 year of GDP growth over 3% and that was mostly because of war spending in early 2004 late 2003.

Since 2001 the economy has been in a stagflation type economy. One of the major reasons for GDP growth during the bush years was 2 trillion in war spending and the housing bubble.

So really our problems started back in 2001 and we have never addressed them. This is another reason why real house hold incomes have not grown since 2001.  The problems came to a head in our last depression in 2008.

Until you address people's incomes not growing the economy will always have these problems. From outsourcing to large companies taking up huge parts of economy. The list is long as to why income is not growing for many people.

Katrina Bull
Katrina Bull

Whilst voters may not blame Obama, and I personally would support his re/election, having seen the 2009 film Inside Job last night, and the scandal over what really started the world crisis, the banks, I would still want to see Obama do far more to curb the behaviour of the banks in the US. Maybe citizens in the US would like to see the banking industry pay far more for their part in the world economic crisis too. I just get the feeling again that they hav gotten away with it, and will do it again..

BenguluruHuduga
BenguluruHuduga

Why blame the private sector  ? I don't quite understand

why 'government' had to back the loans which the private sector loaned

out to people who can't afford .  There are two things here :

a) Govt could have said "no" to the backing of such loans. But if they do it, they go back on the promise to people " affordable housing for every one". So this option is ruled out.

b) Govt is completely out of the way and allow free markets to function which I am in favor of.

If free markets truly was allowed to

work, the loans would have got denied. If a free market denies a loan

its obvious for business reasons. Now fast forward to 2012. The Fed is

buying up assets and lending out at super low interest rates.   Rings a bell of the conditions before the recession hit. This does create a few jobs in real estate sector but its only beneficial to banks, retail sellers etc not the home owner.

There has been a collusion between certain banks (  mostly the big banks) and the government. Get the government out of the way and allow the free markets to function without any politics. All the politicians care about is their votes and re-election.

Extend the same to college education costs which is why a 20 something is coming out with huge loans with rather quite poor prospects of paying it back.

Given all this, the real losers are the ones who actually work hard and save up.

If you truly understand this, you will see why the Government has been creating a problem all over.

18235
18235

whilst = british.

maybe the british would like to see their worthless queen get a job, instead of being such a useless drag on her subjects.

Cmdr_Casey_Ryback
Cmdr_Casey_Ryback

OweBama (D) has hated-on working small businesses from Day 1 -- now, no jobs.

OweBama (D) best job-killer ever.

Like your job? Dump OweBama (D) the job-killer.

18235
18235

jobless liberals and blacks are the biggest supporters of obama----just like the starving in communist north korea love their leader, and president putin has plenty of fans in still poor russia.

ron21
ron21

The next recession will be an all new recession, too many months have elapsed since the last one to qualify it as double dip.  MICHAEL SIVY should know that.

JamesTee56
JamesTee56

Here is a look at how the Federal Reserve's policies have had a series of negative and unintended consequences on the American and world economies and that there is little that Mr. Bernanke can do to "fix" slowing growth:

http://viableopposition.blogsp...