The spotlight continues to shine on the possibility that the economic recovery could stall and a double-dip recession may ensue. Economic data have been far from robust, and last week central bankers at the Federal Reserve cut their outlook on the economy and announced modest steps to bolster activity and prevent another slump.
There are plenty of reasons to be worried that the fragile recovery could stall. Consumer spending has slowed as former spenders have turned into savers, while uncertainty over what will happen to the Bush tax cuts next year may also be playing into investment and spending decisions.
Not only has job creation in the private sector has been anemic, jobless claims, a key indicator of the labor market and an excellent barometer of activity, is a breath away from its January high.
Moreover, without significant increases in new jobs and the additional income that would bring, any rise in consumer spending would likely be muted unless consumer confidence increases dramatically.
In the meantime, manufacturing has also lost some of its muscle. Industrial production that was needed to re-stock empty warehouses seems to have run its course and is not powering growth as it was in the early stages of the rebound.
Lastly, it seems implausible that a powerful recovery could materialize without a rebound in housing and more realistic lending standards among the banks (See New homes face stiff headwinds).
Not all is lost
Corporations have piled up huge cash balances that could mitigate the need for layoffs that would further pressure consumer spending, while manufacturing growth, which has slowed, has shifted to a more sustainable path.
Globally China, now the world’s second-largest economy, continues to expand, and Germany, Europe’s largest economy, just reported robust GDP growth.
Meanwhile, mortgage rates are at or near record lows. Although increased affordability is not fueling a rebound in housing, cheap financing is helping to place a floor under home sales and stabilize the still-struggling sector.
In addition, some homeowners are taking advantage of low rates and are refinancing loans, which will aid disposable income and lend support to spending.
Finally, the only double-dip recession in modern times occurred in the early 1980s when then-Fed Chief Paul Volcker slammed on the monetary brakes to stop inflation. This time around, Fed policy has been geared toward growth, and the latest easing by current Fed Chairman Ben Bernanke and the promise to remain vigilant against a slide in economic activity suggests that the odds of a second decline in activity are still remote.
Yes, a double-dip recession cannot be rule out, as the recovery has been modest at best and the uncertainty among consumers and businesses continues to rein in spending. However, unless there are unexpected shocks to the economy, the number of factors in the plus column outweigh the minuses.
For more information and a look at current issues affecting the economy: Please see Tomorrow’s Economy Today. Additionally, a look at housing starts is also available.