First, it’s important to be clear about what a double dip is, since much of the disagreement we’ve seen as of late seems to arise from the fact that people seem to have different definitions for a double-dip. A slowing of growth, if one wants to call that a ‘double-dip’, isn’t the most shocking event, given how common it is, and given that consensus was forecasting U.S. GDP growth to slow in the second half of 2010 since at least six months ago.
Here, we’re going to talk about ‘double dips’ as a decline in GDP (‘negative growth’, a contraction) that occurs within two years of a recession. This is the truly rare and dire event that deserves the term ‘double dip’, since there has only been one such occurrence since the Great Depression. This is the kind of double which is a threat to markets, since it would represent an aborted GDP recovery.
Meanwhile, merely slowing growth, which some like to call a ‘double dip’, doesn’t represent an aborted recovery. In fact, slowing growth represents a normal recovery, ie. one where there is a sharp initial growth rebound phase, followed by slower growth phase.
Thus, in terms of the threat of a GDP-decline double-dip, the rare and dangerous kind, Morgan Stanley’s David Greenlaw believes that much fo the fear is overblown.
No dip in the second half: The incoming US economic data have been disappointing of late, but we continue to see evidence that the economy will achieve moderate, sustainable growth during 2H10.
Employment is still a challenge, but persistent high unemployment doesn’t mean U.S. GDP will decline, it just might grow very slowly.
Labour market is still the key: Most observers agree that the key to sustaining recovery in the US is the labour market, and we still see signs of a handoff from an export- and productivity-led recovery to a more mature expansion that is sustained by job and income growth.
Stimulus fears are also overdone:
Fading stimulus fears are overblown: After-tax income is finally on the rise, infrastructure spending has only just begun to increase during the past few months, and more support for state and local governments is probably on the way. Meanwhile, the homebuyer tax credit helped to clear out the inventory of unsold new homes.
Here’s the ugly employment vs. GDP chart from his piece, below. Thing is, we see an upside to it. Right now the U.S. GDP is near a record high (grey line), using less people to produce output than ever in 10 years (black line). This means that if the unemployed can discover productive forms of labour, total U.S. GDP can grow substantially even without additional productivity improvements from the current employed workforce. This won’t happen overnight, but one has to admit that from a productivity perspective, the U.S. have become far more productive (in terms of output per person) after this crisis than it was before it:
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