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Americans fear double-dip recession

"You would have to assume that a year from now, we'd be looking at substantially fewer jobs; maybe a million fewer."

Bill Cheney, chief economist for John Hancock Financial Services

Bad economic reports released this past week revived fears of a rare, but dreaded, phenomenon: the double-dip recession. That's when the economy goes into a protracted downturn, interrupted only by a brief spurt of growth.

While most economists still believe that scenario can be avoided, they warn a second round of recession would be far more punishing than the relatively mild 2001 bout.

"It'd definitely be a bad thing," said Bill Cheney, chief economist for John Hancock Financial Services, Inc in Boston. "You would have to assume that a year from now, we'd be looking at substantially fewer jobs; maybe a million fewer."

For workers struggling to recover from last year's recession, the specter is frightening.

"Things are still shaky -- nobody really knows what is going to happen," said Ralph Graley, a Cleveland steelworker who resumed working July 15 after more than six months of unemployment.

Graley, who used to make US$18.50 an hour working for the now-bankrupt LTV Steel Co, is earning US$17 an hour with ISG Cleveland, Inc, a steelmaker. Surviving the layoff was "a real squeeze," he said. "I had to spend a lot of my savings."

If the country were to slip back into recession this fall, "I would say it'd be disastrous," he said. His new bosses are "already kind of saying we're temporary."

Double-dip fears grew this past week after the Commerce Department said second-quarter gross domestic product, a measure of all the goods and services produced in the US, rose at a dismal 1.1 annual rate. Surveys of economists showed most had believed the country was growing at more than 2 percent during the April-to-June period.

Strong contraction

Commerce also announced last year's recession was longer than originally believed. The economy had contracted in the first three quarters of last year, instead of only in the third quarter, according to GDP revisions from 1999 to 2001.

Traditionally, a recession is defined as two or more quarters of economic contraction.

The portrait that emerged from the Commerce reports was unsettling: The economy swooned throughout most of 2001, then resumed growing late in the year. By winter 2002, it was back on track, growing at a revised 5 percent annual rate.

Then in the spring, business started souring again. The Commerce Department found many signs of weakness: declining net exports; softening consumer spending; slowing inventory rebuilding; declining spending by state and local governments.

In addition, the Chicago Purchasing Management Index showed a significant slowing of manufacturing growth in July. Another Commerce Department report showed construction spending declined by 2.2. percent in June from the previous month.

On Friday, the Labor Department said the unemployment rate held steady at 5.9 percent. But payrolls were barely growing, with only 6,000 jobs added nationwide. Before the 2001 recession began, employers had been expanding payrolls by an average of 200,000 a month.

With investors turned off by the weak reports, the stock market continued to struggle. In the first seven months of this year, the Standard & Poor's 500 stock index fell by nearly a quarter. That plunge followed declines in the previous two years. Stocks haven't fallen for three straight years since the end of the Great Depression in 1939-1941.

Given all of those negative signs, some fear the economy may be repeating a pattern last seen in January, 1980, when the country entered a recession. That downturn ended in July, 1980. But the recovery was so feeble that a second recession developed, putting a hard grip on Americans from July, 1981 to November, 1982.

Mike Niemira, senior economist at Bank of Tokyo-Mitsubishi in New York, said double-dips are tough on average workers who don't have enough time to recoup lost wages or win wage hikes. Even during the upswing, "it still feels pretty bad," he said.

A rare event

But Niemira and most other economists say the chances of a new double-dip recession are low because such events are rare. Aside from the Great Depression that spanned the 1930s, the only other double-header recession followed World War I.

The economy shrank from August, 1918, to March, 1919. It resumed growing then, only to slump again in 1920.

The optimists point to the good signs that also were released last week. In a separate report, the Commerce Department found that personal spending rose half a percent in June, while spending on big-ticket items -- goods that last three or more years -- rose 1.6 percent after a big slide the previous month.

The Bush administration's economic team is among the optimists. Lawrence Lindsey, director of the National Economic Council, appeared on CNBC on Wednesday to declare there is "good cause for optimism" because disposable personal income rose in the second quarter.

"The chances of a double-dipper are quite small," he said, predicting growth in 2002 to average as much as 3.5 percent.

Economists seem concerned about the possibility of a new recession, yet reasonably sure it won't happen, encouraged by stable prices, low interest rates and plenty of federal spending.

"I'm still thinking we can avoid the double dip," Cheney said. "There is enough momentum in government spending to keep the economy moving forward."

Kurt Karl, head of economic research for Swiss Re, a re-insurance company in New York, said that as long as consumers keep buying homes and other goods, the economy probably will stay positive. "Frankly, I don't expect a double dip," he said. "The consumer is not in too bad of shape for this point in the cycle."

But there are real risks, he said. Possible factors that he said could trip up the recovery: oil price shocks from a war in the Middle East; new terrorist attacks; a sharp drop in the dollar's value.

While lawmakers and Bush administration officials may debate what can be done to help the economy, economists generally say not much help can come from Washington now.

The Federal Reserve already has cut interest rates to very low levels, Congress has lowered taxes and increased spending, and President Bush last week gained the trade-promotion authority he said he needed to open new markets to US goods.

With all of that in place, Americans just need to be patient now, Cheney suggested.

"The economy is a supertanker; you can't steer it very much," Cheney said. "I think we just need to wait."
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