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?)
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.
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.)
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.
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