The financial media and most of the investment community are haunted with the prospect of a second recession. This so called "double-dip recession" has occurred before in the United States, with the most recent example in the early 1980s. Here are some things you should know about the last double dip recession that occurred a generation ago.

TUTORIAL: Economic Indicators

Blink of an Eye
Part one of the last double-dip recession started in January 1980 and ended in July 1980. This brief six-month economic contraction was the shortest downturn since recordkeeping started in the 1850s, according to the National Bureau of Economic Research (NBER).

Since the NBER has to examine a number of indicators before declaring the peak or trough of an economic cycle, the start of the recession wasn't even declared until June 1980, one month before it officially ended. The same was true with the brief economic expansion that followed, which started in July 1980, but wasn't announced until 12 months later. The first part of the double dip recession was so brief that some economists don't even consider it an official recession and combine both downturns into one recession. (For related reading, see Recession: What Does It Mean To Investors?)

Seconds Anyone?
Part two of the 1980s double-dip recession began in July 1981 and lasted until November 1982. The 16-month duration of the contraction is about average for the 33 downturns recorded since 1854. Just like part one, the official start of the recession was announced in January 1982, about six months after it began. The end of the recession also suffered from timing issues, with an official announcement date in July 1983. The second part of the double dip was brutal for the United States with virtually every part of the economy sharing in the pain. The worst hit area was in the mining, construction and manufacturing industries, with 90% of all job losses in 1982 in these industries.

Unemployment Rate
The unemployment rate is a popular indicator that typically lags the economic cycle. The unemployment rate was at 6.3% in January 1980 when the first part of the double dip began and rose to a peak of 7.8% in July 1980. This unemployment rate also stayed stubbornly high during the 12-month recovery that followed. After part two of the recession began, the rate moved from the July 1981 level of 7.2% to a peak of 10.8% in December 1982.

The trend of employment coming out of the 1980s double dip recession demonstrates how difficult it is to get job growth moving again after a recession ends. It wasn't until June 1984 that the unemployment rate fell to 7.2%, the level when the recession began in July 1981. It stayed at 7.2% only briefly before jumping higher again and stayed in the mid-7% range for another six months. Our most recent recession began in December 2007 and ended in June 2009. The unemployment rate was reported at 5% in December 2007 and peaked at 10.1% in October 2009. It has since fallen to only 9.1% in August 2011, more than two years after the recession officially ended. (For related reading, see The Unemployment Rate: Get Rate.)

Finger Pointing
The 2007 to 2009 recession had many villains, but the 1980s downturn had only one, as many blamed Paul A. Volcker, the Chairman of the Federal Reserve, for the severity of the recession. Volcker considered inflation the main threat and pursued a restrictive monetary policy and high interest rates to fight this. Volcker denies that the Federal Reserve caused the recession and said in an interview that "underlying conditions and imbalances" in the economy would have led to one even without the policies that he implemented.

What Are Our Chances?
It is amazing how many prognosticators are out there declaring that a double-dip recession is underway, especially when you consider how long it takes the NBER to actually make this determination. There is little empirical evidence to support this claim, although it is clear that the economic expansion is slowing.

One economic report that doesn't yet indicate a downturn is the Leading Economic Index reported monthly by the Conference Board. The index was at 116.2 in August 2011, up 0.3% from the previous month. The report did note that the leading indicators point to rising risks and volatility, and increasing concerns about the health of the expansion.

Other economic indicators also support a slow expansion of the economy in the United States. The Association of American Railroads reported that railcar shipments in August 2011 are at the highest level in three years. GDP increased in the second quarter, albeit at an almost imperceptible rate. The Federal Reserve reported that industrial production in the United States rose at a 0.2% rate in August 2011, with manufacturing up by 0.5%. Many business leaders in the United States have reported little evidence of a recession in current business trends for their companies. These include Jeffrey Immelt, the CEO of General Electric (NYSE:GE) and top management at UPS (NYSE:UPS) and FedEx Corp (NYSE:FDX).

One explanation for the obsession with a second recession may be related to the prominent position that the stock market now occupies in the public consciousness, as many may be relying on the daily performance of the markets as an indicator of whether a recession is likely. (Find out where to turn when looking to invest in a tumultuous market. For more, see Industries That Thrive On Recession.)

The short term performance of the stock market should not be viewed as an omniscient indicator of a complex economy and instead be viewed as the collective sentiment of a small number of actors, many of whom may have ulterior motives when deciding to sell.

TUTORIAL: Economic Indicators: Factory Orders Report

The Bottom Line
Although there is a chance that the economy will slip into another recession, the market's obsession with this is probably making it more likely to occur. The media spotlight on this possibility is self reinforcing, hurting confidence and making it less likely that businesses will invest or hire.

Related Articles
  1. Economics

    Is a Recession Coming?

    In the space of a week, the VIX Index, a measure of market volatility, spiked from 13, suggesting extreme complacency, to over 50, evidencing total panic.
  2. Economics

    Leading Economic Indicators: U.S. Bureau of Labor Monthly Stats

    The Bureau of Labor Statistics' monthly employment figures are a key economic indicator. Here's how they work.
  3. Investing

    What’s Holding Back the U.S. Consumer

    Even as job growth has surged and gasoline prices have plunged, U.S. consumers are proving slow to respond and repair their overextended balance sheets.
  4. Economics

    Explaining the Participation Rate

    The participation rate is the percentage of civilians who are either employed or unemployed and looking for a job.
  5. Economics

    What Qualifies as Full Employment?

    Full employment is an economic term describing a situation where all available labor resources are being utilized to their highest extent.
  6. Economics

    A Look at Greece’s Messy Fiscal Policy

    Investigate the muddy fiscal policy, tax problems, and inability to institute austerity that created the Greek crises in 2010 and 2015.
  7. Economics

    How Do Asset Bubbles Cause Recessions?

    Understand how asset bubbles often lead to deep, protracted recessions. Read about historical examples of recessions preceded by asset bubbles.
  8. Professionals

    Holding Out for Capital Gains Could Be a Mistake

    Holding stocks for the sole purpose of avoiding short-term capital gains taxes may be a mistake, especially if all the signs say get out.
  9. Investing News

    What Shook the U.S. Stock Market Today?

    What was looking as a decent year for US Stock market has suddenly gone off track as the Dow Jones Industrial Average plunged 531 points in the week ending August 23, 2015.
  10. Economics

    Understanding Frictional Unemployment

    Frictional unemployment is one aspect of natural unemployment, which is unemployment caused by things other than an underperforming economy.
  1. Regional Asset Liquidation Agreement ...

    An agreement between an asset manager and the Federal Deposit ...
  2. The New Deal

    A series of domestic programs designed to help the United States ...
  3. Accelerated Resolution Program ...

    A program designed to reduce the time and cost of resolving failed ...
  4. Asset Liquidation Agreement (ALA)

    A contract between the Federal Deposit Insurance Corporation ...
  5. Capital Loss Coverage Ratio

    The difference between an asset’s book value and the amount received ...
  6. Gross Cash Recovery (GCR)

    The gross cash colloctions expected over the remaining life of ...
  1. How does the price of oil affect Russia's economy?

    During the second half of 2014, Americans celebrated a rapid decline in the price of oil and gas. Cheap oil has a similar ... Read Full Answer >>
  2. What economic indicators are important to consider when investing in the retail sector?

    The unemployment rate and Consumer Confidence Index (CCI) rank as two of the most important economic indicators to consider ... Read Full Answer >>
  3. How does the risk of investing in the industrial sector compare to the broader market?

    There is increased risk when investing in the industrial sector compared to the broader market due to high debt loads and ... Read Full Answer >>
  4. How can I hedge my portfolio to protect from a decline in the retail sector?

    The retail sector provides growth investors with a great opportunity for better-than-average gains during periods of market ... Read Full Answer >>
  5. What is the correlation between term structure of interest rates and recessions?

    There is no question that interest rates have enormous macroeconomic importance. Many economists and analysts believe the ... Read Full Answer >>
  6. Why should an investor in the retail sector consider the Consumer Confidence Index?

    Investors in the retail sector should consider the Consumer Confidence Index, or CCI, because it measures how consumers feel ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!