Out of Control Policy Blog

Looking at a Projected Double Dip

Nouriel Roubini, aka Dr. Doom, has a tough outlook on where the economy stands right now. His most recent assessment:

A slew of poor economic data over the past two weeks suggests that the U.S. economy is headed for a U-shaped recovery—at best—in 2010. The macro news, including data on consumer confidence, home sales, construction and employment, actually suggests a significant downside risk even to the anemic levels of growth which RGE forecast for H1. The U.S. faces continued challenges in H2—particularly as historic levels of fiscal stimulus fade—and appears far too close to the tipping point of a double-dip recession.

A double dip would be if, after the past two quarters have seen positive (albeit government supported) GDP growth, the economy again entered a recession. It is likely that the technical recession ended last summer as government programs boosted the economy. But since that support is not sustainable, we might see the bottom fall out this year as the stimulus program winds down, housing supports are removed, and the Fed contemplates tightening monetary policy.

Here is what the economy looks like to-date (GDP percentage growth, recession is below zero):

Here is what the economy would look like without government supports (and this ignores the slingshot effect, which could indicate there was no positive growth at all):

The fourth quarter number did shoot up on private sector inventory rebuilding, but that is not sustainable. For more on that see this previous post on Q4 GDP unsustainability.

Finally, here is what a double-dip could look like, if we had a recession return starting in Q2 2010 but bouncing back by 2011 (rough numbers just to show what a W-shaped recession looks like:

I should point out that a double-dip may not be the worst thing for America. If we entered another technical recession, it would be because the first one wasn't allowed to fully adjust prices and resource allocation in the market. A secondary decline would be so that the economy could hit its true bottom and then recovery organically in a way that would be stable and sustainable.

In the meantime, we should be mentally prepared for what a W-shaped recession would look like, and be ready to cope with it. The worst thing would be to pass another stimulus package or leave monetary policy too loose for too long inciting inflation just to avoid some short-term pain.

For more on the fauxcovery see my recent piece in Reason magazine, now on Reason.com.

Anthony Randazzo is Director of Economic Research


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