Is a Double Dip Becoming More Likely?

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In the past few weeks, with a growing number of bad economic reports – including last month’s disappointing jobs number – there has been increasing talk of the possibility of a so-called double-dip recession. That’s when the economy slips back into a recession while still trying to recover from the last one. Indeed, Ben Bernanke’s talk on Tuesday left a lot of people asking why the Federal Reserve chairman isn’t doing more to boost the economy, presumably to avoid this dreaded double dip.

That caused my editor to ask me to find out just how many economists are currently predicting a double dip in the economy. According to the Blue Chip Economic Indicators, which is probably the best survey of economic forecasters, the number of economist predicting a double dip is – wait for it – ZERO. That’s right. Zippo. Zippy-Do-Da. None. Here’s why:

First of all, double dip recessions are very rare. In recent memory it has only happened once, and that was in the early 1980s. As Ed Leamer director of the UCLA Anderson Forecast pointed out, recessions typically happen because people and businesses stop making purchases after a period of heavy activity. And that is not what we have now. Consumers and businesses delayed purchases starting in 2007 and through mid-2010. Only now are businesses restocking supplies and people; their houses. Yes, consumer expenditures have dropped recently, but they are unlikely to plunge, as they would in a recession, after so many people put off purchases at the end of the last decade. What happened in the 1980s was that the first recession, or first dip in the double, was very short – just seven months. So that didn’t cause many people to delay their purchases, or not much. So it would be very unusual, given the pent-up demand that the recession and weak recovery has created, to have a double-dip recession when the first leg was a long one.

( In Ice Cream Sales, No Sign of a Double Dip)

For double-dips to happen you need some kind of self-reinforcing loop that the economy finds it hard to get out of. Kind of like what is happening in the housing market, right now. Falling homes prices lead to rising foreclosures, which lead to falling home prices and more foreclosures. Repeat. Presto, our double dip in housing. But while the continued downturn in housing is slowing the economy and recovery, the housing sector alone isn’t big enough to cause a recession. Or at least if it is, it hasn’t happened yet. Another possible scenario that could cause a double-dip recession would be if investors around the world, because of the recession, became nervous about the U.S.’s ability to repay our debt. That would cause investors to sell our bonds and interest-rates to rise, which would further slow the economy and make it even harder for the U.S. to meet its debt obligations. Repeat. But again, that hasn’t happened yet. In fact, just the opposite has happened. The recession has caused investors to flock to U.S. Treasury bonds. As a result, Treasuries are trading at all-time highs. So the group that thinks the U.S. will have problems paying back our debt must be pretty small.

But still double dips do happen. So I asked some economists what they thought the chance of double dip was, even if they didn’t think it was the most likely scenario, or even likely at all. Nigel Gault of IHS Global Insight was the highest of the economists I talked to. He put the risk of a double dip at 25%. Top Wall Street strategist Ed Yardeni has a double dip at 20%. The ubiquitous Mark Zandi of said the chance of a double dip was 17%. Zandi’s jobs day partner on CNBC Diane Swonk of Mesirow Financial says 10% to double dipping. Leamer, who despite laying out the rising interest rate scenario for me, said he was not a double dipper. Chance of it happening: 5%. This is unscientific, of course. And I may have hit only the most optimistic economists. But that wasn’t my intent. These were the economists who answered the phone in a few hours, which was my only criteria.

I did find one survey that asks forecasters about what they think is the likelihood of having a quarter of negative economy growth in the next year, and it comes from the Philadelphia Federal Reserve Bank. That survey did show that as the economy has slowed in the past few months, economists have upped their chance of a double dip, but only to 12%.

Rather than asking other economists, the New York Fed has a statistical model that predicts the odds of recessions. Right now it puts the odds of a double dip at 1-in-167. What does it all mean? Well, our slow growth economy is unlikely to turn into a no-growth economy. That doesn’t mean more shouldn’t be done to help the nearly 14 million people who are out of work find jobs. But what it does mean is that the worst case scenarios are far-fetched. And when the White HouseĀ  and Bernanke say they believe growth will resume in the second half, that’s not just a wishful thinking forecast – that’s the consensus. Finally, your best odds for seeing a double dip this summer is probably at the ice cream shop.