A Triple Dip?

Michael Boskin:

...Double-dip downturns are more the rule than the exception. If we focus on real GDP and define a double dip as a historical sequence in which a period long enough to be declared a recession is followed by a period of recovery, and then quickly followed by a second outright recession, the 1980-1982 period in the US is a classic example. In fact, defined more loosely as a sequence that includes periods of growth followed by periods of decline, followed by further periods of growth and decline, the 1973-1975 period in the US, with eight quarters of alternating gains and losses in real GDP, was one quadruple-dip recession.

These are not rare occurrences. Around the same time, Germany had this type of double dip and the UK a quadruple dip. In the early 1980’s, the UK, Japan, Italy, and Germany all had double dips. America’s 2001 recession was one brief, mild double dip. Within the current recession, we have already had a double dip; a dip at the beginning of 2008, then some growth, then another long, deep dip, then renewed growth. If the economy declines again – a highly plausible prospect – we would have a triple dip, although perhaps not an outright second recession. ...

Double dips, triple dips, and quadruple dips have been America’s recessionary experience since WWII. And similar episodes have been common in many other countries. ... While the baseline forecast seems to be slow global growth – in the US around 3%, about half the usual pace following deep recessions – history suggests that another decline would hardly be surprising before sustained stronger growth emerges.

Martin Feldstein:

Recent US data have clearly raised the probability that the economy will run out of steam and decline during the next 12 months. The key reason for increased pessimism is that the government stimulus programs that raised spending since the summer of 2009 are now coming to an end. As they have wound down, spending has declined. The government programs failed to provide the “pump-priming” role that was intended. They provided an early spark, but it looks like the spark did not catch. ...

Although annual GDP growth was 3% in the first quarter of this year, almost all of it reflected inventory accumulation – some of which, no doubt, was unwanted build-up caused by disappointing sales. When inventory accumulation is excluded, first-quarter growth of “final sales” was just 0.8% in annual terms – and 0.2% compared to the fourth quarter of 2009.

The second quarter benefited from a surge in home purchases, as individuals rushed to take advantage of the tax subsidy for home buyers that expired in April. But what will happen in the third quarter and beyond now that that program has ended? While it would be rash to forecast a double dip as the most likely outcome..., many of us are raising the odds that we attribute to such a downturn. ...

To reduce the chance of this happening, policymakers should have already put policies in place to provide additional stimulus as insurance against this outcome. But they will wait until another dip actually happens before even beginning to deliberate seriously, and by then it will be too late for policy to do much to offset the dip in the economy. Thus, even though it will be too late to get insurance once the economy is already evidently sick -- insurance that is a bargain due to low interest rates -- we have decided to go forward uninsured, and hope for the best.