Talking About the Odds for the Second Dip

It seems that the U.S. economy is heading towards another recession. There is no other way of describing what the erosion of confidence is doing to it. Although the first half of 2010 has been more than decent, a number of economic indicators are suggesting that the U.S. recovery has lost its luster, to say the least.

What is causing all this nervousness? Among the indicators from last week are orders for durable goods that barely moved in July by 0.3%, new home buys that dropped by 12% to the slowest annualized growth rate since recording commenced in 1963, and sales of existing homes that plummeted off a cliff by 27.2% to the lowest rate since 1999. Even more frightening was the number of 500,000 Americans asking for unemployment benefits just last week, although that probably explains what is happening to the home buying.

Without a shred of doubt anymore, the U.S. economic recovery has hit a major roadblock, which has left many economists and policymakers wonder about its sustainability without additional stimulus. Making things worse is the frail psyche of American consumers and investors who are still very much shaken by the crash of 2008.

The U.S. unemployment rate sits stubbornly at 9.5%. No wonder consumer confidence is hitting new lows week after week. No wonder also that businesses have little to no motivation to start hiring again or investing in new projects. And those who still have their jobs are hoarding cash and trying to replenish their net worth lost during the credit and financial crises of 2008 and 2009. Adding to the problem are lenders that are facing tighter regulatory conditions and, having learned their lesson, are again reluctant to lend, thus impeding new spending and investment.

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What are policymakers to do? How can they stimulate consumer confidence without resorting to further stimulus?

On August 10, during the Federal Reserve’s Open Market Committee meeting, Ben Bernanke said that the Fed would continue with the measured buying of Treasuries to ward off any interest rate pressures. This represents a departure from the Fed’s previous plan to exit the debt market and start working on resuscitating its balance sheet. In fact, the Fed is likely to take quite a detour from quantitative easing, if the disappointing data keep on coming, which is also very likely.

From what I can tell, while nearly everyone is afraid of the double-dip recession, no one is willing to come out flat and say, “Yes, it is coming.” What we are hearing, however, are probabilities. Goldman Sachs, for example, puts the odds at 50%, while Nouriel Roubini, one of a handful of economists who actually predicted the crash of 2008, puts them at over 40%.

I don’t want to call out probability percentages either, simply because I don’t think that’s what the current economic funk is about. When surviving a credit-induced recession, the recovery is never easy. There are ups and there are downs, some more pronounced than others are. We just have to get used to the idea that economic output is going to be sluggish and moving at a snail’s pace for the next couple of years, if not more.