Why an economic 'double-dip' is unlikely

Even as the unemployment rate rises, history suggests the recession won't return

By Anthony Mirhaydari Nov 6, 2009 8:19PM

MirhaydariNo doubt you've heard: The unemployment rate increased to 10.2% last month and is now at its highest level in more than 26 years.

 

That's the bad news. The good news is a robust economic recovery is still on track. And better yet, a drop back into recession looks less and less likely even as unemployment creeps higher.

 

After reviewing U.S. economic history all the way back to the 1850s, Deutsche Bank economists find that double-dip recessions are exceedingly rare: There have only been three episodes in which the economy has fallen back into recession within a year of a previous recession ending. This is out of a total of 33 recessions since 1854. And when these double-dips happened, they happened under circumstances quite different from today's situation.

 

Industrial Production

 

Two of the three double-dips happened in the years prior to World War II: In 1913 and again in 1920.

 

Economists like to cut history into two halves divided by 1945. Why? The pre-WWII economy was much more volatile. Recessions were longer and more frequent. Expansions were shorter. The government didn't actively manage the economy. And although the Federal Reserve was established in 1913, the return to the gold standard under President McKinley in 1900 meant that interest rates were mostly determined by global trade balances and the output of goldmines.

 

The more relevant example was the double-dip of the early 1980s, which was driven by the fight against double-digit inflation rates. President Carter imposed credit controls in March 1980, which resulted in what was a sharp but short-lived recession before the economy expanded again for 12 months. Then, Federal Reserve chairman Paul Volker hiked short-term interest rates to 20% in the summer of 1981 as he pushed the economy back into recession but dealt a death blow to inflation.

 

With deflation just as likely as inflation at the moment, a repeat of the 1980s just isn't in the cards as the Fed is set to keep rates at very low levels until the end of 2010. See my previous post here for more.

 

Disclosure: The author does not own or control a position in any of the funds or companies mentioned.

 

Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.

5Comments
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

114
114 rated 1
278
278 rated 2
474
474 rated 3
641
641 rated 4
639
639 rated 5
663
663 rated 6
640
640 rated 7
499
499 rated 8
284
284 rated 9
122
122 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
DYNDYNEGY Inc10
TAT&T Inc9
VZVERIZON COMMUNICATIONS9
EXCEXELON CORPORATION8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.