Why an economic 'double-dip' is unlikely
Even as the unemployment rate rises, history suggests the recession won't return
No 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.
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.
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Stocks drift lower and bonds are hit as investors await the Fed. Prepare for higher volatility this week.
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