The U.S. economy is so bad that the chance of avoiding a double dip back into recession may actually be pretty good.
The sectors of the economy that traditionally drive it into recession are already so depressed it’s difficult to see them getting a lot worse, said Ethan Harris, head of developed markets economics research at BofA Merrill Lynch Global Research in New York. Inventories are near record lows in proportion to sales, residential construction is less than half the level of the housing boom and vehicle sales are more than 40 percent below five years ago.
The possibility of the economy lapsing into another contraction during the next year is 25 percent, he said in a Sept. 1 report. Harris cut his forecast for growth this year by 0.1 percentage point to 2.6 percent and lowered his 2011 estimate by a half point to 1.8 percent, according to the report.
Federal Reserve policy makers agree that a renewed contraction is unlikely, although the risks have risen.
“I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace,” Fed ChairmanBen S. Bernanke said in an Aug. 27 speech.
The Standard & Poor’s 500 Index might increase to about 1,300, while the yield on the 10-year Treasury note would rise toward 4 percent during the next six months or so if the U.S. steers clear of another decline, said James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management, which manages $342 billion.
The S&P index closed at 1,080.29 at 4 p.m. yesterday in New York, while the yield on the 10-year Treasury note was 2.58 percent at 4:12 p.m., according to BGCantor Market Data.
Orders for nondefense capital goods excluding aircraft, a proxy for future business investment, fell 8 percent in July, the biggest decline in one-and-a-half years, while sales of new homes dropped unexpectedly to an annual pace of 276,000, the lowest level on record, according to Commerce Department figures released last week. The department also reduced its estimate of second-quarter growth on Aug. 27 to 1.6 percent from 2.4 percent.
The unemployment rate probably rose to 9.6 percent this month from 9.5 percent in July as employers reduced payrolls by 100,000, according to the median forecasts of more than 70 economists surveyed by Bloomberg News. The Labor Department is scheduled to release the jobs data on Sept. 3.
History argues against such a setback now, said Randall Kroszner, a former Fed governor who is now a professor at the University of Chicago Booth School of Business. Other industrial nations that experienced major financial crises, such as Spain in 1977 and Sweden in 1991, avoided double dips, though their recoveries were slow.
Even Japan, which suffered a lost decade of minimal growth after a real-estate bubble burst in the early 1990s, managed to stage a three-year rebound before its economy was knocked back down by the 1997-98 Asian financial crisis.
The only double dip in the U.S. since the end of World War II occurred 30 years ago, when the economy turned up in mid-1980 only to fall back into recession a year later. That situation isn’t applicable today, said Gramley, who was at the Fed at the time. The initial decline in 1980 was triggered when President Jimmy Carter imposed credit controls. He quickly reversed himself when the economy collapsed in response.
Post-war recessions traditionally have been prompted by the Fed boosting rates to fight inflation, oil prices rising sharply or businesses suddenly reducing inventories, Gramley said. None of that looks likely this time, he added.
The Fed cut the overnight bank lending rate to close to zero percent in December 2008 and has signalled it intends to keep it there for an extended period.
Oil prices have fallen as growth has slowed. Crude oil for October delivery settled at $73.91 a barrel yesterday on the New York Mercantile Exchange, down from the 2010 high of $86.84 set on April 6.
