Christopher Thornberg: A double-dip recession is very unlikely
01:00 AM EDT on Wednesday, September 14, 2011
By Christopher Thornberg
LOS ANGELES

With all the recent market turbulence and mediocre economic reports, some economists have been warning of a high probability of a second recession — a double dip — by year’s end. But before you get spooked, I would suggest that there are a couple more “D’s” we need to look at — namely drivers and data. Once you do that, you will see that these fears are largely overblown.

First the driver. Economies don’t randomly fall into recessions — they are caused by a large shock to the system. The last downturn was caused by the combined shock of the consumer-spending pullback after years of home-equity-fueled overspending, and the debt crisis that the banking system is still digging out from.

What is the driver?

Some say oil prices. But the U.S. is more resilient regarding oil prices than ever before, in part because energy spending is a smaller share of consumption than it ever has been, and because Americans have transportation options — swapping SUV for hybrids. Furthermore, prices are down more than $30 a barrel from the peak earlier this year.

How about weak labor markets? Employment is a lagging, not a leading, indicator. It sags after the economy does, not the other way around. Unemployment doesn’t cause recessions — it is caused by recessions. Last month’s zero net new job growth was driven by the strike at Verizon. With that done, the actual number was plus 48,000. Not good — but not recessionary, either.

The stock markets? There has never been a stock market crash that caused a recession by itself. Rather, stock-market crashes occur because of whatever negative shock caused the recession. There are many cases, such as in 1988, when the market dropped sharply — bringing no recession because there was no other shock.

Then there is Europe, where excessive public debt and slow growth have caused financial jitters aplenty. But the shock — a default — has yet to occur. Only lowly Greece is truly on the brink — and while that would harm some European banks, with the lessons of Lehman Bros. fresh in the minds of regulators you can bet your bottom dollar that a European Troubled Asset Relief Program will cushion the blow to their banking system. Realistically, it seems a small probability that any of the major European economies will be in trouble at any time in the next year or more.

Finally, housing. The modest declines in home prices ended in the spring. Now all the major price indexes, including Case Shiller and Core Logic, all show home prices starting to rise slowly. And while sales of homes are softening a bit, the number of seriously delinquent mortgages is falling. The worst is clearly behind us.

So what do the data say? The biggest source of weakness in the first half of 2011 was consumer spending — particularly in the second quarter. But this was largely because of the brief spurt in inflation that was driven by food and energy costs, combined with a lack of cars on dealer lots. In the former case, the pressure is off because of falling oil prices. As for the latter — we know it was a supply issue because the price of cars has risen sharply in recent months — the exact opposite reaction we would expect if the decline in sales had been demand driven.

The supply chain is starting to move again, pushing up U.S. industrial production, along with sales, in July. Consumer spending was also up.

The data surrounding leading indicators of consumer demand — namely delinquency rates on consumer loans and growth in consumer credit — point to better times. With interest rates falling, this will give consumers more leeway. Another leading indicator of a downturn is falling home starts. They aren’t falling; they have just been sitting on the bottom for a number of years. And non-residential construction is picking up speed.

As for business spending — it remains low from a long-run perspective — so it’s hard to see this turning largely negative. Bank data from the Federal Reserve say that the outstanding quantity commercial and industrial loans grew sharply in August. Firms are borrowing.

So I see that chance of a double-dip recession is pretty close to 0 percent for the second half of 2011, short of some major development unforeseen above.

This isn’t to say things are fine. The U.S. recovery is still too slow to get the nation back to the growth trend it was on pre-recession. The result is a labor market producing too few jobs to meaningfully bring down the unemployment rate. The federal deficit is frightening, and there could be preliminary signs of inflation creeping into the economy.

But with all the truly worrisome stuff we need to deal with, why create menacing stories about a phantom double dip?

Christopher Thornberg is an

economist and founding partner of Beacon Economics LLC. He wrote this for The Sacramento Bee.

No you don't....

One cannot simply view things from orbit. The only possible action while in orbit is to nuke them.

"Phantom double dip" goes along with two other phrases I had no expectation of seeing or using but have over the past couple of days.

The other two were "flatulent spectre" and "semen vampires." Best not to dwell on either.

The other two were "flatulent spectre" and "semen vampires." Best not to dwell on either.

Aren't those just high falutin' names for "Stinker" and "Succubus"?