Will We Be Hit with a Double Dip Recession?

This week an op-ed piece in The Wall Street Journal  discusses the real possibility that we might face a double dip recession.  While many optimists have been claiming that the recession is over and that the economy is looking up, the stock market has been taking investors for a wild ride.  Plus, over 17% of Americans are still unemployed or underemployed.  Is the economy on its way to a healthy recovery?  Or, are we headed instead for a double dip recession?  Let’s look at both sides of the argument now.

On the plus side, The Wall Street Journal this week also reports on declining mortgage rates that might fall to 4.5% this summer.  This is great for consumers that need a new mortgage or who might want to refinance their homes.  Interestingsly, this mortgage rate drop comes as a result of money from outside the U. S. that is seeking the safety of the U. S. economy.  So, money has been flowing into U. S. bonds.  While America has its own significant economic problems, we still look a whole lot safer than those European welfare state economies on the verge of potential or technical bankruptcy.

On the negative side, however, our current “quasi-recovery” has been marked by persistent and stubborn unemployment, at levels much higher than earlier in the decade.  Unemployment is still at 9.9% with the more inclusive U-6 metric at 17.1%.  U-6 includes unemployed worker, plus discouraged workers who have given up looking for a job, and also includes part-time workers who want full-time work but can’t find it.

In addition, there are other significant concerns that might be foreshadowing a double dip recession.  The knee-jerk reaction of Germany, banning naked short-selling on European government debt, derivatives, and other stocks, plus the reaction of Europe to the problems in Greece are not the kinds of pro-growth and pro-market policies that would likely lead to a better economic future for the European continent.  European countries seem to prefer their welfare state socialism and its discredited economic model of spend, tax and borrow, rather than putting themselves on a path to robust recovery.

The Wall Street Journal op-ed piece also points out three other factors that might help bring about a double dip recession.  These are a widespread deflationary trend among Western nations, a decline in American bank lending, and a decline in the velocity of money.

To illustrate the deflationary trend, consider the CPI (the core Consumer Price Index) in the U. S.  In April, it fell to its lowest level in 44 years!  In Ireland, their April CPI  fell 2.1% year-on-year.  In April, Spain saw their first core CPI deflation in the history of their CPI data series that dates back over 20 years.

While forecasting is always a difficult and tricky task, on balance it would seem to me that a double dip recession is a real possibility, that is, unless we see major changes in economic policies.  For now, anti-growth and anti-market policies seem to be in favor among government policy makers both in America and Europe.  Too bad for all of us!