Is Another Recession On The Way?

It’s been clear for a while now that the current economic recovery won’t be a “V-shaped” one, in which a steep decline is mirrored by an equally sharp rebound. Although data from the National Bureau of Economic Research indicate that the recession ended two years ago, this recovery has been more halting than those in the recent past. Corporate profits have enjoyed a solid resurgence, but the specter of a still-high unemployment rate and moribund housing market loom large.

Economist Carmen Reinhart, and others, think that the economy will move sideways for the foreseeable future. But others are more pessimistic, especially lately. Economist Robert Shiller of Yale was recently quoted in Barron’s that risk for another downturn is “substantial.”

Morningstar.com Discuss forum participants also have mixed opinions about the direction of the economy, based on their responses to my recent query, posted in the Market Insights section, about the likelihood of another recession. Although true optimists were few and far between, some posters pointed out that periodic blips are inevitable given the depths of the recent downturn. Other posters believe that we’ll muddle along in a sideways fashion for the foreseeable future. A large contingent was even more downbeat, with a somewhat surprising number arguing that we never fully emerged from the previous economic downturn. A healthy number of posters, meanwhile, pointed out the folly of trying to guess the direction of the economy, period. To read the complete thread, click here.

“A Slow, Uneven Recovery” (But Still a Recovery)

In the “no repeat recession camp,” Poster Gtaylor is optimistic about the economy’s resilience. “It seems to me that capitalism, albeit always aggressive, is also always fragile, held together with scotch tape and chewing gum, appearing pretty much doomed in anything longer than the medium term. Still, it keeps coming back. It might have gone down in the 1930s, but it didn’t. I don’t think it’s going down this time, either. [Economists Kenneth] Rogoff and [Carmen] Reinhart have told us that the comeback from a bad financial crisis is likely to be slow, and that appears to be what’s happening–a slow, uneven recovery. But still a recovery. Barring black swans.”

Uncleharley, while taking care to distinguish between the stock market and the broad market, has faith in the forces of supply and demand to help avert another recession. “Since we are talking about the economy rather than the stock market, I will have to say no, I don’t expect another recession. My reasoning is that there is much in the economy that is self-correcting. For instance the recent slowing in the rate of growth has put a cap on gasoline prices and even brought them down a notch, freeing up some consumer dollars to be spent on other stuff. I expect the economy to muddle along for some time to come. However, I do not necessarily feel the same way about the stock market.”

Poster Judyken harnessed personal business experience to opine: “I do not expect another recession. Quite frankly, I expect the second half of the year to be better for my business (metal manufacturing) than the first half.  I expect the economy to slow down during the last half, but not to reach negative growth. As I see things, there was bad news to which the market did not pay attention. We are now focused on Greece, the U.S. budget, unemployment, mortgage failures, and any other news we can think of that is not good. As frequently happens, the market is emotional and less-than-rational. All these negative issues existed three to four months ago.”

Juddongbo also believes that the recent hand-wringing over the economy has been overdone, writing, “I think we have hit a soft patch, but growth will pick up in the second half. I do worry that Washington policies surrounding the debt ceiling might create some problems for the market.”

Shades of Gloom

Juddongbo isn’t the only one concerned that congressional bickering, particularly as it relates to raising the debt-ceiling limit, could derail the fragile economy.

Pete02 wrote, “The market has consistently underrated the very real threat that congressional failure to raise the federal debt ceiling will result in serious damage both to securities markets and to the economy. The disagreements between Tea Party members and Republicans are so strong, and the differences in perspective between them and the Democrats are so great, that there is a growing rather than diminishing risk that they will fail to reach agreement during the next six weeks, triggering a default on Treasury bonds, a sharp and deep decline in the stock markets, and severe resulting consequences for the economy.”

More broadly, Missy14 worries that partisan bickering could hang over the economy for the foreseeable future, though she wishes it were otherwise. “Our politicians seem to be so busy working against each other rather than resolving the problems involved that I think it is going to be a long hard struggle for the economy to improve. They are more obsessed with their own differences that they are in the problems that exist. It sure is a nightmare.”

Although some posters were hesitant to assign odds to another recession, several said they think economic weakness will remain with us for the foreseeable future.

MichaelTBF summed up the case for a “meh” (or worse) economy. “Double dip? No! Stagflation? Yes, without a doubt.”

Resident economic expert Capecod is concerned about the strength of the consumer, writing, “Whether we actually experience the two negative quarters of gross domestic product growth required for a slowdown to ‘count’ as a recession is impossible to predict. However, the highly reliable [Economic Cycle Research Institute] long- and near-term leading indicators are pointing to at least a significant slowdown. After an emerging-markets growth-driven runup enhanced by speculation and ‘investment,’ commodity prices have retreated significantly–likely signaling lower demand and less global growth. Finally, with nominal wages stagnant, real wages dropping, and employment gains barely covering new entrants to the labour force, our economy’s engine–the U.S. consumer–is unlikely to drive the final sales required to boost GDP. I’d say we are in for at least a rather rough patch ahead.”

Other posters were even more pessimistic.

Count Jimmynj12 among the worried ones. He wrote, “I believe that another recession is still a very real possibility. The Great Recession created and is still sustaining an unexplained high unemployment rate for a time frame far beyond any other recession in the history of the U.S. stock market. Throw in broke and indebted governments at every level, and there is a sense of uneasiness that prevails in my outlook.”

Matthew9, meanwhile, is worried about what will happen when the era of cheap money grinds to a halt. “I would say, yes, I now expect [another recession] more than not. Our economy has been propped up on cheap leverage for some time, but we’re extremely close to that trend ending. The period we’re in reminds me a lot of the late 1970s, early ’80s, when we had to endure two recessions in relatively short period of time. Unfortunately current conditions for strong long-term growth aren’t in place like they were in 1980.”

Based on his own business experience, antiqueron argues that we’ve already entered another recessionary dip; the statisticians just haven’t caught up. “I have been in business 34 years importing antiques and making hardwood tables. Every time a recession has started I could pinpoint it by my sales and customer sentiment. My price point is high: $4,000 average ticket. I believe the recession started back in February, and the pundits will announce this about October.”

 

Same Old, Same Old

An even larger contingent of posters surmise that even though the recession may have ended in technical terms two years ago, it’s still going on from a practical standpoint.

SergeantMajor laid out the case with this post: “I don’t believe we ever really left the recession behind except in technical terms. Historically, recession recoveries are more robust than what we are currently experiencing. I believe the current ‘recovery’ will be anemic at best, and probably will falter for at least the next three to five years.”

javesv also thinks the current “rebound” is little more than a mirage. “I agree with those who say we never left the recession. The current policies of kicking the can down the road and injecting trillions of dollars into the system have been good at giving an ‘illusion’ of recovery and forestalling an actual depression, but few of the underlying issues have actually been corrected.”

Dragonpat commented on the myriad factors that have kept the economy from getting on its feet. “I feel that we did not pull out of the ‘first’ recession, so that dipping again is not likely (that is, dipping below our already-low level). Unemployment is at record levels. The national debt is at record levels. Foreclosures are at record levels, and strategic defaults are increasing. Maybe because large multinationals are sitting with record amounts of cash on their balance sheets, some of the executives at these companies do think we have pulled out of the first recession?”

Stubbornly high unemployment rates were top of mind for the pessimists.

Gtoerr wrote, “There are still so many unemployed and underemployed out there that I think we never left the first dip, regardless of the ‘official’ definition of a recession. So much underused talent is such a waste. I wish I could come up with a brilliant business idea and start employing folks myself.”

The 62 Dawg sees a gloomy jobs picture, too, writing, “Ask those in my hometown, where the unemployment rate is still near 20%. They are still suffering from the first recession.”

Poster Wood4648, meanwhile, believes that a still-deflating housing-market bubble will be the key impediment to putting the downturn behind us. “Let’s take off the rose-coloured glasses. We’re still in the first recession, and it may easily last for another eight to 10 years. In Florida, 18% of the homes are currently empty. Many other states are not far behind. The number of homeowners nationally who are underwater on their mortgages is beyond comprehension. When interest rates rise in the not-so-far away future, the amount of people capable of purchasing homes will be decreased even further. We have a huge underclass struggling to survive.” (I urge you to read the complete post.)

SusaninCA also lays the current weakness at the doorstep of the housing market. “The term ‘double dip’ implies that the recession ended for Main Street, and I don’t think it did. From my perspective, an educated middle-class person, our homes were the main source of wealth. People used the equity they thought they had to finance everything from the latest technology their kids wanted to the college education that was increasing dramatically in price, while salaries were pretty flat. Salaries are now lower or gone, home equity is lower or gone, but the necessities of life and a college education are still going up.”

Mind Your Own Business

Other posters pointed out the folly of getting too concerned about issues over which each of us exerts so little control, particularly if the end goal is to jockey around our investments.

EasyAsItGoes opined, “Why individuals worry about things completely beyond their control is beyond me. Even if I were nail-bitingly terrified of a double-dip recession (which assumes we have in fact managed to free ourselves from the first one) there is no amount of saving, investing, or spending I can do that will make a difference.

“Since my actions will make no difference in the ultimate outcome, I find it pointless to worry. That said, I remain steadfast to my investment philosophy: 50% in stocks, 40% in bonds and 10% in certificates of deposit, cash, convertibles, a little gold, and so on. If people would take most of the emotion out of investing, they would probably wind up better off 10 years from now. At least they would not be spending so much money on aspirin and Rolaids.”

Bnorthrop put forth a similar viewpoint: “My concern about a double-dip recession is equivalent to my concern about getting hit by a car while riding my bicycle to work. Hazards exist, and it is up to us to recognise and reduce risks.”

Finally, NormanR grounded the discussion by sharing this bit of wisdom. “A lot of life is about perception. Human beings also have a strong disposition to worry about the wrong things. ‘Will so-and-so win American Idol tomorrow?’ or, ‘Will I win the lottery?’ or, ‘Will I be struck by lightning?’

“The reality is I am more likely to be in a serious automobile accident. There are many things which are far more significant in my life than any of the previous examples. Did I meet my income and savings targets last week, last month, last year, and the last decade? These are questions which will have a significant impact on my personal life in the future.”

This post originally appeared on Morningstar.

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