Slow economic recovery with a recent fall in GDP hints towards the likelihood of a second recession for the US economy. So, are we really headed for a double-dip recession?
Even though the recession in the United States ended in July 2009 according to economists, there seems to be a slow recovery from its effects. The unemployment rate is still high, while consumer spending shows a very passive growth. It seems like the economy is about to enter a second recession, a double-dip. Perhaps, that is why several Americans fail to recognize the end of the previous recession that hit the US in December 2007, while there are others who believe that the economy is in a period of depression. But, would you blame them? An era of recession spanning more than two years means that the economy is in depression.
Double-dip recession is a situation wherein an economy faces another recession shortly after recovering from the previous one, due to a negative growth in GDP.
During the recovery period from a recession, an economy has a 50% chance of falling back into negative growth and facing a double-dip recession. We all know, two quarters of negative growth in the GDP is essentially recognized as recession.
10 Signs of a Double-dip Recession
High Fuel Costs
The hike in oil prices witnessed worldwide post the BP Gulf Oil Spill has put economies around the world under stress. In the United States, the oil prices have shown a rising trend unlike the slow economic growth we have been experiencing after the growth in the first quarter of 2010. This has affected the several businesses directly as well as indirectly due to their dependence on transport. Limited supply of fuel coupled with high demand is bound to increase prices further in future.
Rise in Food Prices
The food prices have doubled. Did you notice how your burgers are getting leaner while their prices keep getting revised every few months with a rise in 5% to 10%? Bread costs 11.3% more, the price of cheddar cheese is up by 20.8% and ground beef is 15.1% pricier than they were in 2010. Your groceries, coffees, food items on the menu and everything else you eat is showing a gradual but a steep increase in prices. As you know, food prices directly correspond to the change in oil prices, however, income levels show an opposite trend. Every household definitely spends on food and the rising food prices are now becoming an even more important matter of concern than before. Since 2005, food prices have risen extremely sharply. The price of groceries has increased by at least 3.5% on an average since last year. By next year, this figure could be as high as 5% or 6%. Go find your coupons!
High Unemployment Rate
For employment opportunities to increase, the economy needs a GDP growth of at least 3% to combat high unemployment. However, the GDP growth in the first quarter of 2011 was recorded at 0.4%, while it was overall 0.8% for the first half of the year. It seems that the job deficit created by the previous recession has not been filled in the recovery period. Fresh statistics as of August 2011 have recorded an unemployment rate of 9.1%, as per the US Bureau of Labor Statistics. Increased productivity of the present employed workforce and the mechanization of most jobs that people were laid off from in the recessionary period, has made it even harder to bring down the unemployment rate under 9% when 6% should have been the rate for the economy to recover.
Fragile Housing Market
States like Nevada, California and Arizona have experienced a dip in housing prices by as much as 50% since the 2007-2009 recession. Credit unavailability and heavy unpaid mortgages have stimulated a persistent downfall in real estate prices. They are further expected to fall by 10% all around the United States because 2 million houses, that were foreclosed since 2008, have still not been released into the housing market. Even if you were interested in buying a house, the down payment on it would be as high as 20%, on an average. This has not only affected the household budget of owners of these houses, but also many people have lost jobs in the housing and construction industry. This has also forced the aged population (above 65 years) to continue with their jobs as it is now difficult to rely on their houses to take care of retirement plans.
Increased Borrowings Cost
Decrease in net profits, increasing cost of medical facilities and social security and credit unavailability, need I say more? Presently, the debt ceiling for US stands at approximately $14.294 trillion. This will be further pushed as the interest rates rise and increase the cost of borrowing. Also, loans have become difficult for small businesses to procure because banks have now become wary of businesses that have fewer customers. This is further slowing down economic growth because small businesses are very important to drive the GDP of the economy. Also, government expenditure has significantly decreased, reducing any benefits or provisions that could have been made available in such harsh economic times.
Low Consumer Spending
Inflation spurs a rise in savings by the citizens of a nation. The previous recession prompted Americans to load up their piggy banks and reduce their spending. High mortgage payments have already bankrupted a part of the population and others still struggle with low incomes. With a lack of jobs and lower-income, the consumer confidence has been constantly dwindling, affecting the consumer spending. For those of us unaware of this little fact, 70% of the American population are consumers! However, even after the recession, the recovery period witnessed a languid growth in consumer spending due to their lack of confidence in the stability of the economy in the future. Did you know? The consumer spending has grown by 0.1% in the second quarter of this year since the first one.
At a growth of 2%, the federal budget deficit is no longer reliable enough to save more jobs. The deficit may be reduced by the government, even when consumer spending is deficient, while the economy shows no signs of a boom period. There have already been predictions of more job lay-offs this year as well as the next. Doesn’t seem like the government would be in a position comfortable enough to provide a cushion for you until you are unemployed, because a third of the unemployed population has been unable to find a job since a year! China and Europe have tightened credit availability internally as well externally, severely affecting trade volumes of US to its two major trading partners. The debt crisis is apparent with the increasing tax burden on the economy.
The government’s unsuccessful attempts at curbing the rise in inflation trends has largely affected consumer confidence. They are now inclined towards saving more and spending less. This seems to be a bad time for investments too as the returns seem to be lower than ever before. Also, rise in the cost of cotton crops have increased the cost of apparel, in turn. The inflation rate has been recorded at 3.6% for the month July 2011, the highest this year so far. Our economy may very well be shrinking. Perhaps, this era will just turn out to be a depression.
Low Investment Returns
The debt crisis in Europe and ‘economic slowdown’ of China, has affected capital flow in the economy. The stock market has also shown a downward spiral trend since its recovery post the recession 2007-2009. Investors are worried that European financial institutions might need bail-outs. This will have a negative effect on Euro valuation and may spread to the dollar. The government has been trying really hard to keep interest rates close to zero percent in a bid to encourage public spending. But, this has come as a really bad news to investors who are already upset by the 1% Dow growth in 2011. As S&P 500 index dwindles too, invest your money in out-of-money ‘put’ options. Perhaps, investing in overseas stock markets and high-dividend yielding stocks or ten-year treasuries that promise a return of 3%. As an investor, your first instinct may be to invest in gold, however, gold no more remains to be a very safe option for investments as its value has been steadily rising along with silver and there will probably be a “bubble effect”, making it vulnerable to inflation. What seemed like a full recovery of two quarters, we experienced post the recession, was actually our government printing currency in heaps and bounds to stimulate money circulation in the economy. But, even that has failed to work for us now.
Auto Industry Lay-offs
Even though companies like the Big Three – General Motors, Chrysler and Ford, may have made a recovery from the losses suffered in the last recession, the auto industry has probably made these profits by reducing operative and administration costs through lay-offs, further widening the gap between the employed and unemployed. The high fuel costs still are a threat to car sales and many automobile companies may witness a diminutive growth in profits in the forthcoming quarters that have neglected production of cheap fuel-economy cars. Although car sales have begun to pick up now and auto-companies like Toyota, Honda and Volkswagen have begun hiring people again, continuing low consumer confidence and spending signal a plateau in sales. Worse, people are now cutting back on travel to save up on fuel costs. US was once the world’s largest automobile market due to China recently assuming its place. In fact, most of the increase in car sales volumes this year can be attributed to new vehicle buyers lured by sales gimmicks influencing consumer purchase decisions. But, this growth may fall back again in 6 months.
History of Double-dip Recession
The occurrence of a double-dip is very rare with the only sightings in the economic history of the United States being the years 1913, 1920 and the period of 1980-1982. The American economy has faced 33 recessions in all. But, with recession of 1980 post World War II, that lasted for two quarters, came the downturn plunge of credit availability to fund external borrowings. However, it started showing recovery in 1981, but the GDP growth suddenly showed a downfall trend in the last quarter of the same year. The second recession persisted for 2 quarters again, until the United States finally stabilized its high inflation rate as well as interest rate. However, even though the government has rolled up its sleeves to ensure that phenomenon doesn’t repeat by 2012, the unemployment rates remain high, signaling low-income and consumer spending trends.
With 13.3 million (statistic for December 2011) still unemployed Americans since the recession of December 2007, it seems that the second recession is soon to arrive in the United States. But, it may even be only a jobless recovery because of which we remain in fear that a second recession may be creeping onto American economy. However, as the economy starts to stabilize and return to its previous state, that may not necessarily happen. Notably, it can also be very well avoided by the government by introducing short-term unemployment benefits, price stabilization and reduction in tax rates.