Double dip recessions bring back the doom and gloom of a has been recession and return an economy to the economic ring of fire. In economic terms, a double dip recession is determined by a weakening in economic activity according to the U.S. Bureau of Economic Research.(4) A double dip recession would then be a return to a weakened economy after an economic recovery.
Another definition of a double dip recession is the return of Gross Domestic Product (GDP) to negative numbers following a brief interlude of positive GDP growth that follows the first recession.(1) According to economists, double dip recessions may also be referred to as 'W' shaped recession where the two dips in the 'W' represent the double dip recession, and the quick incline in the middle is the intermediary recovery. Listed below are attributes of a double dip recession.
• Return to negative GDP growth after a partial economic recovery
• A second 'bear market' within equity securities exchanges
• W shaped vs V or U shaped economic and market performance
• Low to negative income per capita growth
• High unemployment and low consumer spending
Causes of double dip recessions
Double dip recessions are not very common, or at least have not been very common in the last 100 years. So far there has only been one double dip recession in the last 70 years and this occurred in the years between 1980-1982. Economic indicators that may accompany and reveal a recession or recession like conditions may also include a decrease in corporate earnings and reduced industrial output.
The specific causes of recessions can vary because economies are dynamic and intertwined. This means a change in any one large global economic block can influence other global economies. Similarly, large industries within an economy can have a greater influence on economic performance than sectors with less impact. Any number of factors can cause industries or an economy to decline some of which are pointed out below.
• Business economic cycle
• Lower demand
• Loss of market share
• Natural catastrophe
• Misguided economic regulation
Probability of a double dip recession in 2010
The Last double dip recession of 1980-1982 came with similar and dissimilar economic conditions to the years 2008-2010. Both periods saw large drops in investment capital, rises in unemployment and declines in GDP.
To better understand what caused this double dip recession of the early 1980's to occur a look at the economic conditions in the early 1980's is revealing.(2) One thing that was different between the recession of 2008-2009 and that of the early 1980's is inflation. Since GDP is calculated with inflation factored in,(3) the inflation of the 1980's served as an additional drag on economic realities than it did between 2008-2010.
The inflation rate in the 1980's was a drag on economic recovery and led to a decline in spending power in addition to unemployment, lower GDP and drops in investment. On the other hand, in 2008-2009 inflation was relatively controlled and considerably lower in contrast.
In 2008-2009 high levels of consumer debt existed, however aggressive fiscal and monetary policy was also in place which served as an economic stimulus. The fear of a double dip recession occurring is/was partially rooted in the capacity of the economy to continue growing after fiscal stimulus ran out according to economists such as Emanuel Roubini of Roubini Global Economics and the NYU Stern School of Business.
A double dip recession is not necessarily in the offing as described in a report by Barry Ritholtz also of Roubini Global Economics. Among the reasons Ritholtz refers to are a traditional cooling off period during economic recovery.(5) Additionally, it is not necessarily the case as industries, consumers and businesses have had time to economically adjust, for example by lowering costly inventory holdings. Also, lower inflation and continued growth friendly monetary policy such as historically low lending rates provide further basis to believe a double dip economy may not occur.
Another definition of a double dip recession is the return of Gross Domestic Product (GDP) to negative numbers following a brief interlude of positive GDP growth that follows the first recession.(1) According to economists, double dip recessions may also be referred to as 'W' shaped recession where the two dips in the 'W' represent the double dip recession, and the quick incline in the middle is the intermediary recovery. Listed below are attributes of a double dip recession.
• Return to negative GDP growth after a partial economic recovery
• A second 'bear market' within equity securities exchanges
• W shaped vs V or U shaped economic and market performance
• Low to negative income per capita growth
• High unemployment and low consumer spending
Causes of double dip recessions
Double dip recessions are not very common, or at least have not been very common in the last 100 years. So far there has only been one double dip recession in the last 70 years and this occurred in the years between 1980-1982. Economic indicators that may accompany and reveal a recession or recession like conditions may also include a decrease in corporate earnings and reduced industrial output.
The specific causes of recessions can vary because economies are dynamic and intertwined. This means a change in any one large global economic block can influence other global economies. Similarly, large industries within an economy can have a greater influence on economic performance than sectors with less impact. Any number of factors can cause industries or an economy to decline some of which are pointed out below.
• Business economic cycle
• Lower demand
• Loss of market share
• Natural catastrophe
• Misguided economic regulation
Probability of a double dip recession in 2010
The Last double dip recession of 1980-1982 came with similar and dissimilar economic conditions to the years 2008-2010. Both periods saw large drops in investment capital, rises in unemployment and declines in GDP.
To better understand what caused this double dip recession of the early 1980's to occur a look at the economic conditions in the early 1980's is revealing.(2) One thing that was different between the recession of 2008-2009 and that of the early 1980's is inflation. Since GDP is calculated with inflation factored in,(3) the inflation of the 1980's served as an additional drag on economic realities than it did between 2008-2010.
The inflation rate in the 1980's was a drag on economic recovery and led to a decline in spending power in addition to unemployment, lower GDP and drops in investment. On the other hand, in 2008-2009 inflation was relatively controlled and considerably lower in contrast.
In 2008-2009 high levels of consumer debt existed, however aggressive fiscal and monetary policy was also in place which served as an economic stimulus. The fear of a double dip recession occurring is/was partially rooted in the capacity of the economy to continue growing after fiscal stimulus ran out according to economists such as Emanuel Roubini of Roubini Global Economics and the NYU Stern School of Business.
A double dip recession is not necessarily in the offing as described in a report by Barry Ritholtz also of Roubini Global Economics. Among the reasons Ritholtz refers to are a traditional cooling off period during economic recovery.(5) Additionally, it is not necessarily the case as industries, consumers and businesses have had time to economically adjust, for example by lowering costly inventory holdings. Also, lower inflation and continued growth friendly monetary policy such as historically low lending rates provide further basis to believe a double dip economy may not occur.
Sources:
1. http://bit.ly/duEkQT (Investopedia: Double Dip Recession)
2. http://bit.ly/bxEKKw (Watson: San Jose State University)
3. http://bit.ly/aViDps (Investopedia: GDP)
4. http://bit.ly/sPmS3 (National Bureau of Economic Research)
5. http://bit.ly/bEjG7w (Riholtz: Roubini Global Economics)
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