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U.S. News --- THE OUTLOOK: What It Would Take to Do a Double
Dip
By Justin Lahart703 words13 June 2011The Wall Street JournalJThe
Wall Street Journal - Print and OnlineCTGWSJA2English(Copyright (c)
2011, Dow Jones & Company, Inc.)Corrections &
AmplificationsThe Federal Reserve is allowing its $600 billion
bond-buying program to expire this month. The Outlookcolumn on
Monday incorrectly said it was a $600 million program.(WSJ June 14,
2011)(END)For those fretting that a string of disappointing U.S.
economic data presage a double dip in the recession,there is good
news and bad news.The good news: It would probably take a
significant shock to knock the economy off course, even in
itsweakened state. The bad news: In the current environment there
are plenty of potential shocks to worryabout.History doesn't offer
much consolation. In the summer of 1981, the U.S. economy entered
the second,harrowing chapter of a double-dip recession. Now, almost
exactly 30 years later, the economy has slowedmarkedly, raising the
risk of a repeat performance.Most economists reckon the economy
will right itself. The recent rough patch is probably temporary,
theysay, due largely to three factors: First, supply-chain
disruptions caused by the earthquake and tsunami inJapan; second,
severe weather and flooding in the Southeast and Midwest; and
third, high gasoline pricesthat in recent weeks have begun to
ease.And history also says that even when the economy is weak, as
it now appears to be, it will continue to growunless something big
comes along to upset it, according to Stanford University's Bob
Hall, chairman of theNational Bureau of Economic Research committee
of academic economists that dates the beginning andend of U.S.
recessions. According to the panel, the latest recession ran from
December 2007 to June 2009."The shocks that have pushed us into
recession have not been that small," Mr. Hall says. "It takes
asignificant adverse impulse, I think."A severe shock triggered the
second downturn in 1981. After inflation quickly took hold again
following thebrief 1980 recession, the Federal Reserve pushed
short-term interest rates above 20%, slamming thebrakes on the
economy. Millions lost their jobs in what was, up until then, the
worst downturn since the1930s.
Today, even with recent increases in food and energy costs,
inflation is only a fraction of what it was in theearly 1980s, and
the Fed appears committed to keeping low interest rates in place.
And while the Fed isallowing its $600 million bond-buying program
to expire this month -- rather than extending it, as someeconomists
would like -- this is unlikely to knock the economy off kilter.But
the wrangling over the budget in Washington could stifle the
economy just as a Fed rate increase would,says Bank of
AmericaMerrill Lynch economist Ethan Harris. On the one hand, he
worries that if thecongressional standoff over raising the debt
ceiling persists, it could push Moody's and Standard & Poor's
tocut their rating on U.S. sovereign debt. That could roil credit
markets, stanching businesses' access tocapital. On the other hand,
Mr. Harris worries that in their zeal to tame the budget, members
of Congressmight make deep cuts to the budget at a time when the
economy is too weak to handle them.Page 1 of 2 2011 Factiva, Inc.
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"We need to get past this budget debate," Mr. Harris says. "It's
very debilitating for the economy.Then there's oil. The price of
crude has eased recently, but with the situation in Northern Africa
and theMiddle East unsettled, a fresh spike higher in crude prices
can't be ruled out. With household balance sheetsstill badly
damaged by the housing bust, consumers have far less wiggle room
than usual to handle highenergy prices, says Harvard University
economist Ken Rogoff. "They can't just take it out of savings."Mr.
Rogoff is among those economists who deem a double-dip recession
unlikely. But his research alsoshows that following financial
crises, economies tend to grow only fitfully. Viewed in that
context, the roughpatch that the economy has lately hit shouldn't
be a surprise, nor should it be a surprise if there are more
ofthem.License this article from Dow Jones Reprint ServiceDocument
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