Welcome to the Next Recession
Even before the U.S. was officially declared to be in a recession, experts began to warn of the possibility that the economy might recover only to nosedive again into what is known as a double-dip recession. In the last weeks of 2008, the National Bureau of Economic Research revealed what many already knew: the U.S. was in a recession and had been since December 2007. Yet months prior to that announcement, the Wall Street Journal reported in February 2008 that analysts from Morgan Stanley and Global Insight were predicting a modest recovery later in that year and into the next from government funding and tax incentives, only to be followed, inevitably, by a steep decline in the first half of 2009.
Well here we are in the middle of 2010 and economists are still debating whether a double-dip recession awaits us in the months to come.
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Are We In Danger of Another Crash?
On the one hand, prominent groups like the American Bankers Association believe the U.S. economy is out of the woods and far along in its “lengthy rehab process.” Furthermore, CNN Money interviewed a number of economists and found that most put the likelihood of a double-dip recession at 20%-30%, which is not terrible, but not exactly comforting either.
Yet, there are many who have argued in recent months that the double-dip remains a possibility. Earlier this year, Nouriel Roubini, one of the few economists who predicted the original recession, penned a column in Forbes declaring that recent economic data in areas like our gross domestic product and employment rates led him to believe another recession could occur. And even President Obama warned the leaders of the G20 countries that a double-dip recession could occur if they are too quick to withdraw government support of their economies.
This debate has taken on a bit more urgency in recent weeks as Finland officially entered another recession, becoming the first country in the European Union to suffer a double-dip.
We take a look at several key factors that determine our likelihood of a falling into another recession.
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By definition, a double-dip recession only occurs when a country’s Gross Domestic Product (GDP) is negative, meaning our economy is contracting. When President Obama took office in the first quarter of 2009, the economy had contracted by 6.4%. By comparison, the GDP in the fourth quarter of 2009 grew by 5.6% and in the first quarter of 2010 it increased by 3.2%.
All things considered, these sound like good numbers, but according to MarketWatch, they are also an indication of how fragile our recovery is and will continue to be. “In the past six months, GDP has expanded at a 4.4% pace, faster than the 2.8% average over the past 25 years, but it has failed to surge into 7%-to -10% range as typically happens after a deep recession,” they report.
However, the GDP is only part of the story. To get a fuller picture, you also need to consider our national debt.
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As we reported in May, the U.S. debt has now topped $13 trillion for the first time in our nation’s history. But as scary as that number may sound, the more important statistic is that the debt is now at 90% of the GDP, and according to Bloomberg, is quickly on the verge of overtaking our GDP all together. No, the world won’t end when the debt reaches 100% of the GDP, but according to ABC News, if our debt starts to approach 150% of GDP or more, it could cause inflation to spiral out of control and further imperil our economy.
Alan Greenspan, the former chairman of the Federal Reserve, even went so far as to declare last week that we could end up in a similar position to Greece, which had to be bailed out by the European Union this year because of its own debt crisis. The Obama administration has publicly denied that we are at risk of ending up like Greece, but the director of the U.S. Office of Management and Budget did admit that we are on an “unsustainable fiscal course” and the government must get its spending in check to prevent a long-term crisis.
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Last month, retail sales declined by 1.2%, the biggest drop in eight months. The news caused the stock market to drop and renewed fears that the economy is not nearly as stable as some would like to believe. As Irwin Keller wrote in MarketWatch, “Since retail sales make up over half of all consumer spending, it is safe to say that at least one-third of the gross domestic product is now falling. It is also not a stretch to conclude that the rest of consumer spending, which is services, is soft as well.”
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One bit of positive news this year has been the fact that home sales are up. In April, pending home sales increased by 6%, which is good, although less than the growth in the two months prior. Yet, as many have pointed out, this growth is likely due to government tax credits and the housing market may be much worse off when these credits run out.
Even now, however, there are plenty of signs that the housing market is very fragile. Construction on new single-family homes dropped last month to its lowest level all year, the confidence of home builders is on the decline and fewer consumers are searching for homes online or signing new housing contracts.
On top of all that, economists have argued that housing sales ultimately depend on more than tax credits; they depend on job growth, and that may prove to be its undoing.
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In October 2009, unemployment reached 10.2% and in the months since then, it has continued to hover around that infamous 10% benchmark. And according to Fortune, unemployment could remain this high for months to come.
Most recently, the May jobs report showed the unemployment rate dropped to 9.7% as the economy added more than 400,000 new jobs. But the downside of these numbers is that the majority of jobs that had been added were temporary positions with the U.S. Census Bureau. As it turns out, only 41,000 permanent, new jobs were actually added that month.
This fact led the Christian Science Monitor to declare bluntly that “We’re falling into a double-dip recession.” The publication focused on the dismal amount of new long-term jobs combined with the fact that more than 1 million Americans have admitted they gave up looking for jobs in May and the average amount of time that Americans have been unemployed has increased to 34.4 weeks.
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State Budget Crises
We tend to focus a lot on how our economy is faring at a national level, but it’s equally crucial to understand how the 50 states are holding up individually. The answer, it seems, is not too well. Last year, reports came out claiming that 46 of the 50 states could face deficits that would be serious enough that they may go bankrupt. That certainly seems extreme, but according to one study from the National Conference of State Legislatures, the 50 states plus Puerto Rico may face a $90 billion budget gap. This could end up undermining our economic stability down the road.
Check out MainStreet’s article on extreme tactics that states are using to try and balance their budgets.
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The number of foreclosures jumped by more than a third in the first quarter compared to the previous year, with one in every 138 homes receiving a foreclosure notice. Last month, the rate of foreclosures began to decline, largely because the banks decided to go easier on delinquent homeowners and let them stay in their homes longer instead of initiating the foreclosure process. Yet, as SeekingAlpha points out, there were still more than 300,000 homes foreclosed on and the number of bank repossessions reached a monthly high of more than 93,000.
These are not comforting numbers and they are made worse by speculation that there are still millions more foreclosures to come. As we reported recently, some estimate there are between 2 million and 8 million more homes that are either delinquent or have been repossessed but are not yet on the foreclosure market. Others put the figure as high as 10 million.
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