Double-dip recession highly unlikely
Deutsche Bank research shows a drop back into recession looks less even as unemployment creeps higher.
Good news: 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 found 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. 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 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 is not likely in the cards as the Fed is set to keep rates at very low levels until the end of 2010.
Tom McClellan of the McClellan Market Report has some more potentially good news. He points out that the level of employment tends to follow stocks on a 12-month lag, which means that a turn higher could come as soon as March if precedents hold up.
So while skeptics will continue to be preoccupied by a still rising unemployment rate and political chatter over the perceived failure of the Obama administration's stimulus package -- the smart money will continue to anticipate the improvement just over the horizon.
One final note: The economists at ISI Group note that outside of the United States, employment already started to grow in eleven economies. These include Japan, Canada, Singapore, Brazil, Russia, Sweden, and Taiwan.
Stocks have sniffed out the fact that a global employment turn is already happening. The U.S. economy just isn't fully participating yet, but it will.
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In this installment of Investor Beat: The Fed chief tells Congress that it's too soon to end the stimulus program.
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