No double-dip recession in sight — yet

It’s amaz­ing what a dif­fer­ence a few weeks makes. Just a lit­tle more than a month ago, the nation’s econ­o­mists seemed to have turned decid­edly pes­simist, with a few indi­cat­ing the U.S. econ­omy had already entered a double-dip reces­sion. Even those who were not quite so bleak in their assess­ment were throt­tling back on their GDP fore­casts for the sec­ond half of this year, with many sug­gest­ing eco­nomic growth in the 1 to 2 per­cent range.

And what brought about this nasty change of heart, when just a short time ear­lier these same ana­lysts were antic­i­pat­ing a 3 per­cent or bet­ter sec­ond half expan­sion? Basi­cally, a num­ber of bad reports came out for August. The employ­ment report showed (ini­tially) no gain in total pay­roll employ­ment, ini­tial claims for unem­ploy­ment insur­ance started to trend upward again and con­sumer sen­ti­ment and spend­ing seemed to point to tepid growth.

But then the eco­nomic clouds parted and the over­cast skies turned partly sunny. The Sep­tem­ber employ­ment num­bers showed a gain of bet­ter than 130,000 in the pri­vate sec­tor, even as pub­lic sec­tor employ­ment con­tin­ued to track down­ward. What’s more, those seem­ingly depress­ing num­bers for August (and July) were revised upward to show jobs growth of nearly 100,000 above what had ini­tially been esti­mated. As well, the con­sumer sec­tor showed that it still had some life. As a result, the nation’s tea-leaf read­ers reversed direc­tion and bumped up their GDP fore­casts again. On Thurs­day, we’ll get to see which of these faces of inde­ci­sion seem to be cor­rect when the third quar­ter advanced GDP fig­ures are released. For my part, the growth fore­cast for the sec­ond half remains unchanged since the begin­ning of the year, that is, the July-December months will likely see the econ­omy grow by a very mod­est 2.0 to 2.5 percent.

If all of this turns out to be any­where near the mark, the U.S. econ­omy will once again have shown a remark­able resilience that many ana­lysts seem to under­es­ti­mate, as their out­looks seem to change with the monthly flip of the cal­en­dar. And why does this hap­pen so often? Unfor­tu­nately, econ­o­mists seem to for­get some basic sta­tis­ti­cal theory.

For each set of eco­nomic data released by the gov­ern­ment, there is always a “mar­gin of error” and a “level of con­fi­dence” asso­ci­ated with the infor­ma­tion. That’s a fancy way of say­ing that the data are sim­ply esti­mates, sub­ject to revi­sion and with the pos­si­bil­ity that the survey-based fig­ures may not prove par­tic­u­larly accu­rate. When added to a process called “sea­sonal adjust­ment” (to remove sea­son­al­ity from the infor­ma­tion col­lected), it means that great care should always be taken when inter­pret­ing the likely mean­ing of the esti­mated data. Sadly, these cau­tion­ary efforts are often ignored.

On the other hand, basic eco­nomic the­ory (which allows us to move beyond indi­vid­ual data gyra­tions) should pro­vide some clue as to what the future may hold. And when exam­ined on this basis, the pos­si­bil­ity of enter­ing a double-dip reces­sion is cer­tainly not passed. Much will depend on a num­ber of fac­tors that will unfold between now and year’s end. For exam­ple, as of Dec. 31, two fac­tors will revert back to their orig­i­nal sta­tus unless Con­gress acts; both of which could have a size­able influ­ence on con­sumer spend­ing. When the Times Square Ball falls, the two per­cent­age point reduc­tion in the Social Secu­rity tax rate that pri­vate sec­tor work­ers have enjoyed in 2011 will end and they will once again pay their full 6.2 per­cent into the sys­tem. As a result, for every­one impacted, after-tax income will drop by 2 per­cent and poten­tially cause con­sumer spend­ing to fal­ter. On that same date, the abil­ity of unem­ployed work­ers to move into higher extended fed­eral unem­ploy­ment insur­ance cat­e­gories will end, and within weeks/months, the funds some fam­i­lies cur­rently depend upon for spend­ing will halt.

Beyond the uncer­tain out­look for peo­ple, busi­nesses may also cut back on oper­a­tions as their tapped-out cus­tomers take a breather. In part this behav­ior is cur­rently being exhib­ited, as com­pa­nies con­tinue to stock­pile cash to sur­vive another poten­tial down­turn. Finally, the biggest cur­rent unknown of all is the out­look asso­ci­ated with the Euro­pean sov­er­eign debt cri­sis. Should the issue explode into a Greek default, Euro­pean banks would be placed at risk, liq­uid­ity could dry up and another world­wide finan­cial mar­ket panic could ensue.

All-in-all, it seems there is still plenty of oppor­tu­nity for eco­nomic growth to fal­ter, even to the point of top­pling back into reces­sion, though likely not any­time this year.

Dr. James New­ton serves as chief eco­nomic advi­sor to Com­merce National Bank and is an aux­il­iary fac­ulty mem­ber in eco­nom­ics and sta­tis­tics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not nec­es­sar­ily reflect those of Com­merce National Bank or OSU-Marion/Newark.

Posted by Jim Newton on Oct 25 2011. You can follow any responses to this entry through the RSS Feed. Comments can be made below.