Fallout: The Financial Crisis

If there was a double-dip recession…

Marketplace Staff Aug 24, 2010


Bill Radke: The glum news about housing has put new life into the question we’ve been hearing all summer: Are we headed for a double-dip recession? That’s when the economy shrinks and grows and then shrinks again.

Most economists say that’s still unlikely, but it’s getting less unlikely. And it’s worth asking: If we do shrink again, are we any better prepared this time around?

Gus Faucher is director of macroeconomics at Moody’s Economy.com. Welcome to Marketplace.

Gus Faucher: Thanks Bill.

Radke: It feels like we’ve been preparing for another recession. People who can have been paying down their debt, not spending. Of course, that’s part of our problem, but would it make a second recession easier to bear/

Faucher: I think so. I think households have cut back on their use of credit, they’ve raised their savings. So I think they’re going to be in much better financial shape if we do experience a double-dip recession this time around than they were when the last recession started.

Radke: If you’ve still got a job.

Faucher: That’s right. I think the key is that for people who are still working that they’ve done a good job of paring back on their debts, they’ve done a good job of saving more, and so they’re in better financial shape.

Radke: And what about our companies — in a way they’ve been preparing too. They’ve been criticized for being so conservative, sitting on their money and not hiring. How positioned are companies to weather a double-dip recession?

Faucher: They’re fairly well positioned. Profits are up, in part because firms have cut back so sharply on labor during the recession. They’ve refinanced their debt, they’ve paid down some of their debts, so if you look at interest payments, as a share of revenues, that’s way down. So firms are holding onto their cash, they’re being very cautious, and that will serve them well if we do experience a double-dip.

Radke: Well, would that mean a double-dip recession doesn’t have to mean another jump in unemployment? Maybe companies don’t have to keep cutting?

Faucher: Well, I still think we’d still see job losses, but certainly nothing on the same scale as what we saw earlier. One reason is that firms have less room to cut labor simply because they cut so sharply in the past recession. But also, I think that they’re still going to try and maintain their profitability, but they’re in better shape going in. So I think that the cutbacks will be less severe this time around.

Radke: We’re all worried to some extent about government debt. How would another recession hit governments that are already underwater with voters who don’t want to go into more debt?

Faucher: Well, certainly, we’d see the federal budget deficit widen. There’d be more spending on social programs as the unemployment rate moves higher. And then also we’d see revenues fall, people are going to be getting less income, so they’re going to pay less in income taxes and payroll taxes. And then states and localities would have a very severe problem. They’re just right now starting to come out of the big hole that they’ve been in because of the recession, unless they get more aid from the federal government though, with the double-dip, they would need to make more budget cuts. So we’d see bigger lay offs at the state and local levels. It would be a real problem.

Radke: What is the risk, Gus, that we’re over-prepared. That all our hunkering down might cause that double-dip recession.

Faucher: Well, certainly, that’s some of what we’re seeing, and that’s why people are so nervous. Businesses are reluctant to hire until they’re sure that the increase in demand is real. Consumers are unwilling to increase spending until they’re sure that the labor market is going to turn around. And that in turn is leading to some anxiety in the economy, because we aren’t seeing the job gains that were expected. So, there certainly is a potential for this to become self-reinforcing into actually causing a double-dip recession.

Radke: What’s your forecast, Gus? Are we recovering or are we slipping backward?

Faucher: We’re growing, but slowly. Certainly not enough to create enough jobs to bring down the unemployment rate. It’s going to be another rough six to nine months, and then, we should see things pick up early 2011. Start to see some stronger job growth, consumers will feel better and we’ll see the unemployment rate come down. But it’s going to be a pretty difficult process.

Radke: OK, a big, unpleasant tasting single-dip, we’ll call it.

Faucher: Yes.

Radke: Gus Faucher, director of macroeconomics at Moody’s Economy.com. Thanks a lot.

Faucher: Thank you.

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