Are We Headed for a Double Dip Recession?:

Are We Headed for a Double Dip Recession?
To-date, economic recovery in the United States has been like a cross-country drive over bumpy roads in a car that has bad shock absorbers and three small children in the backseat. The economy is moving forward, and everyone looks forward to arriving at the destination, but progress has been slow and frustrating. Unfortunately, I think there is a significant chance—about 50 percent—that the economy could slide back into recession during the second half of 2010. Here are a few of the potential risks to our current recovery:

·        Monetary and fiscal stimulus will end soon. In normal circumstances, the U.S. economy grows without government support. Unfortunately, current growth has been driven by a massive injection of monetary and fiscal stimulus, which was provided to prevent a potential meltdown of the financial system. By the middle of 2010, government stimulus programs will wind down, and the Federal Reserve’s emergency liquidity measures will end. If the economy is not strong enough to grow on its own, we may dip down into recession again.

·        Chronically high unemployment. About 20 percent of working-age Americans are unemployed or underemployed.[1] This causes consumer spending, the primary driver behind America’s economic growth in the recent past, to remain low. For the economy to keep growing, America needs to create more jobs.

·        A second housing crisis. The Federal Reserve has been buying asset-backed securities and other mortgage-related debt. Once it stops buying, rates may increase as sellers try to attract new buyers. Higher interest rates could lead to higher mortgage rates, lower home sales, and a decline in housing prices. This could result in more home foreclosures and weaken consumer confidence. In addition, the nation’s shadow inventory of housing, which includes bank-repossessed properties and distressed mortgages that have not foreclosed yet, could take nearly three years to clear at the current sales rate.[2] This also will put pressure on home prices.

Recession may create opportunity for investors

While a double dip recession would not be welcome, the same factors that make continued recovery uncertain create opportunities for investors.  If you would like to learn more, please give us a call.