Is the “Double Dip” Back?


By Lynn Reaser

The fiscal trauma in Europe and financial turmoil in the markets have again raised the specter that we could see a “double-dip” in the U.S. economy with a return to recession after several months of recovery.  The risk is certainly palpable.  Persistent fears over defaults in some of Europe’s peripheral countries and consequent bank losses could cause credit markets to seize up as they did in the fall of 2008.  Even without a major freeze in financial markets, falling stock prices and uncertainty could undermine both business and consumer confidence.

Yet, there have been some favorable offsets from the events of the past two weeks.  Interest rates have moved lower, with mortgage rates falling back below 5.00%.  Oil prices have also dropped, with the price of crude oil declining to around $70 a barrel.

The National Association for Business Economics (NABE), an organization of 2,300 of the nation’s leading business economists, has just released its latest forecast survey.  http://nabe.com/publib/macsum.html.  The forecasters are relatively optimistic about the prospects for the U.S. economy.

The survey panel believes that the U.S. economy will show good, even if not spectacular, growth both this year and next.  Real gross domestic product (GDP) will expand at a pace averaging about 3.2%, which would be above our long-term potential of about 2.8%.  This growth should be enough to create more jobs, although the unemployment rate will only gradually move lower. 

Inflation should not be a major worry in the short-run, according to the economists, because of the continuance of significant slack in the economy.  The modest rise in prices will probably keep the Federal Reserve on the sidelines until the end of the year, with the federal funds rate only edging up to 0.5% at year-end.

Significantly, the economists also see banks easing up slightly in their lending to small businesses as the year proceeds and they believe that stock prices will ultimately end this year with a gain based on a sizable gain in corporate earnings.

While risks have intensified, signs are emerging that European nations are taking steps to address their fiscal imbalances, which should help to stabilize the credit markets.  Meanwhile, the U.S. economy appears to have developed a significant amount of momentum, which should enable the recovery to continue unless the European and market turmoil escalates further.

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