by Danielle Kurtzleben

5 Reasons a Double-Dip Isn't Coming

There are plenty of reasons to worry about the U.S. economy right now, but a double-dip recession might not be one of them. To be sure, recovery from the Great Recession has been disappointingly slow, with GDP figures thus far in 2011 showing alarmingly slow growth. Likewise, unemployment seems mired above the 9 percent mark. Still, a double-dip recession is by no means assured, and indeed to some economists is unlikely.

Joel Prakken, chairman of economic consulting firm Macroeconomic Advisers, says that the likelihood of a double-dip recession "has risen over the last couple of months, but I'd put it at 1 in 4, 1 in 3, maybe. It's certainly not a slam dunk." It's far more probable that the United States will continue to see more of the same, he adds: "I think a much more likely forecast, one that will prove to be the right one, is a period of sluggish growth." Indeed, there are several reasons why it's not quite time to panic about the prospect of another recession.

1. Small businesses going strong.

The August ADP employment report estimated that private-sector employment increased by 91,000 from July to August. That number is far from confidence-inspiring, considering that the economy needs to create around 125,000 jobs per month to keep pace with population growth (and the public sector, which continues to shed jobs, will not likely contribute much to the official monthly total). However, ADP estimates that 58,000 of those jobs created in August were in firms with fewer than 50 employees. Prakken believes that this is a nugget of good news in an otherwise lackluster report. "Within that total [of private-sector jobs created], the small business, small payroll numbers were the strongest component, and that's always heartening, because the data suggests, and I do believe, that small businesses will be the ones to lead us out of the economic doldrums," he says.

2. New spending.

One of the most promising indicators in recent weeks has been the July consumer spending figure, which showed that personal consumer expenditures increased 0.8 percent in July, the fastest rate in five months. This is clearly a good sign -- even while Americans continue paying off debt, they are still buying goods and increasingly fueling the recovery.

And some of that spending increase may have been due to purchases of durable goods, those that do not need to be purchased frequently, and can include appliances, jewelry, and furniture. The July durable goods report showed that orders for manufactured durable goods were up 4 percent over June. As some of these goods can be significant investments, this may also mean that households are increasingly willing to spend.

3. Labor market holding steady.

Healthy spending means job creation, so the labor market may be buoyed by Americans' purchasing power through the current rough patch, according to Conrad DeQuadros, economist at research firm RDQ Economics. "One of the indicators that's very important for us for looking at recession risks is initial jobless claims, and that has been on a downward trend," he says, noting that slight upticks in new unemployment insurance claims over the last two weeks were partially due to a strike by Verizon workers. "There is no suggestion there that labor market conditions are deteriorating, and to me that suggests that the labor market will remain ... supported by consumer spending," says DeQuadros.

4. Deceptive indicators.

Several recent indicators that have lent particular weight to double-dip fears may not be as significant as they seem. The Philadelphia Fed's August Business Outlook Survey, for example, showed the worst reading on manufacturing activity since March 2009. The Conference Board's Consumer Confidence Index also dropped by 14.7 points from July to August, and now stands at 44.5, its lowest point in over two years. But DeQuadros discounts the importance of both of these readings. "I think that a lot of the recession talk has been driven by the Philly Fed reading," he says. "Since that report, we've had quite a few reports that I think have been better than expectations, certainly reports that suggest that the Philly Fed index exaggerated the weakness in the manufacturing sector." He also points out that a closer look at the Conference Board's consumer confidence figures shows that consumers' expectations for future growth dropped, while their confidence in their present situation in fact changed little from July to August.

5. No major shocks.

Growth is slow and the jobs situation is a mess, but that by no means prefigures negative growth, says Prakken, who notes that movements in the stock market and current credit availability do not show signs of an impending "shock event" that might trigger a recession. He adds, "The configuration of other financial and shock events that preceded other recessions are not in place now. And once you hold constant for those other forces, the times that economic growth has slowed this much they have not been moved right into recession."

 

Don't Fear the Double-Dip Recession