From the Expert: Double Dip Recession Unlikely

E-newsletter Issue #49 | June 24, 2010

States continue to eye national economic signals warily as they recover from the extraordinary rigors of the Great Recession—the longest, deepest, broadest and most severe economic crisis since the Great Depression. Given the up and down nature of the recovery, some have speculated the U.S. economy could face the possibility of a dreaded “double dip” recession, a recession that’s followed by a short recovery and then another recession..

The national unemployment rate remains stubbornly high at 9.7 percent as of May; a number of European countries are saddled with unsustainable levels of debt; there’s a growing uncertainty over the economic and environmental fallout from BP’s oil spill; and the wild gyrations in the stock market continue. Those issues, along with other adverse economic developments, have anxiety levels justifiably fomented in a number of financial sectors.

Nevertheless, despite these multiple economic challenges, my review of a range of different economic data leads me to conclude that the U.S. economy will continue to grow, a development that will eventually bring relief to states in the form of increased revenues and broad-based economic growth. While state revenues will continue to lag the national economic recovery and states will face considerable fiscal headwinds going into both the 2011 and 2012 fiscal years, there is room for cautious optimism.

The national economic recovery that began in the latter half of 2009 has maintained its momentum, and the latest projections from the Federal Reserve indicate real gross domestic product will grow at about 3.5 percent in 2010 and at a slightly speedier pace next year. The tremendous monetary stimulus initiated by the Fed continues to percolate across the country, and there are still federal American Recovery and Reinvestment Act funds being disbursed that will continue to act as a fiscal stimulus to the economy.

Most significantly, the economy is growing, and that is a huge improvement over where we were in 2008 and parts of 2009. Even though the unemployment numbers for May 2010 were certainly anemic from a private sector perspective, there was growth. While the U.S. economy will gain considerably more from sustained growth in private sector jobs, the 411,000 U.S. Census workers that secured jobs in May will now have money to spend in their communities and promote economic activity across the country.

According to the latest Fed Beige Book report, all 12 Federal Reserve Districts—covering every region of the country—achieved growth. Even though many districts described the pace of growth as modest, it was still the first time since 2007 that the Fed Beige Book showed improvements in economic activity in every area of the country. This is certainly an important development. Further exploration of the growing sectors in the economies of the 12 Fed districts indicates consumer spending and tourism activity generally increased. This is significant because two-thirds of the U.S. economy involves consumer spending.

Further corroborating rising consumer confidence was the fact that the Reuters/University of Michigan consumer sentiment index at the end of May 2010 rose to its highest level since January 2008, a noteworthy development. On a net basis, business spending also rose, with employment and capital spending accelerating but inventory investment slowing. A sector breakdown of the growth indicates that non-financial services, manufacturing and transportation all expanded, albeit gradually. Finally, residential real estate activity in a number of districts was bolstered by the April homebuyer tax credit deadline.

So, on balance, I have a high degree of confidence that we will not slip into a “double dip” recession, though there are certainly many major challenges out there, particularly for those at the state level. For instance, the latest federal statistics reveal that 16 states have double-digit unemployment rates, including a number of states that ranked among the fastest-growing just a few years ago (Florida, Georgia, Nevada and North Carolina).

State policymakers also have to devise solutions to a number of intractable problems, such as responding to the structural weaknesses in state tax systems and devising solutions to a host of dilemmas related to education, health care, transportation, pensions, unemployment insurance, infrastructure and emergency management.