Is a Double-Dip Recession on the Horizon?

With debt ceiling fears quelled, new worries about another recession are cropping up.


With back-to-back rounds of dismal GDP figures and a seemingly endless parade of other disappointing economic reports, the prospect of a double-dip recession is gaining traction among economists and financial experts.

The economy has barely grown in 2011, according to recent government figures, registering a meager 1.3 percent gain in gross domestic product in the second quarter, revised downward from initial estimates of almost 2 percent. That figure comes on the heels of revised first quarter readings that clocked in at a stunningly low 0.4 percent, prompting many experts to doubt whether the promising recovery that began in 2009 is now on its last legs.

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"We're on a knife edge right now," says Justin Wolfers, associate professor of business and public policy at The Wharton School of the University of Pennsylvania. "We're on the cusp of recession. We maybe already have had one—that's really just one data revision away."

Historically, when growth dips below 2 percent, a recession is already underway according to data from the Bureau of Economic Analysis. Since 1970, there have been seven instances of sub-2 percent growth and recession was avoided in only one case.

"The thing about GDP growth is that it tends to be persistent," Wolfers says. "Good news tends to be followed by good news, bad news by bad news. That then suggests that we're looking at a very weak second half of the year as well."

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Sustained weakness makes the economy increasingly vulnerable to negative economic shocks, experts say, which has the potential to tip the balance in favor of recession. "The analogy sometimes drawn is that a bicyclist that's going very, very slowly is more unstable than a bicyclist who's going relatively fast," says Nariman Behravesh, chief economist at IHS Global Insight. "The point is that when growth is this weak, it doesn't take much of a shock to push the economy over the brink. That's the risk here."

The hypothetical shock that could push the economy over the brink is unpredictable, but a confluence of issues bubbling under the surface—the intensifying eurozone debt crisis, flat consumer spending at home, and the prospect of reduced government spending—are all factors adding to the risk of another recession.

"My best guess is that there's not going to be a double-dip recession, but rather small growth," says Ted Gayer, senior fellow at the Brookings Institution. "But if you do see some sort of negative shock, you could potentially be at risk for [recession]."


So while it's not a foregone conclusion that the U.S. will be gripped by another recession, the risks are mounting. At the very least the U.S. is in a "growth recession," economists say, a term that describes an economy that's technically expanding, but not fast enough to stave off high unemployment, currently hovering around 9.2 percent.

That's where the core of the problem lies, experts say. The economy may be still hurting from a series of temporary hiccups, but unless the labor market improves, that weakness will persist, leaving the economy more susceptible to shocks and keeping global financial markets on edge.

"The key thing I'm looking at is the employment report on Friday in the light of the unemployment claims numbers we get on Thursday," says Tara Sinclair, assistant professor of economics and international affairs at George Washington University. "It's probably the best real-time predictor of where we are. I'm really going to be looking for changes in that number."

The economy has been adding jobs for the past several months, but not as many as economists had hoped and nowhere near the rate that experts say is needed for the economy to grow. To keep the unemployment rate steady, the economy would need growth of about 3 percent annually. Only at a 5 percent growth rate would we see a meaningful impact on unemployment figures, economists say.