Double Dipping

by Elaine Schwartz    •    Aug 28, 2010    •    636 Views

For a smile, you might want to watch Merle Hazard’s “Double Dippin'” song. As the Guardian points out, also look for the fun trivia such as a small background picture of mathematician Benoit Mandelbrot.

No one was smiling, though in response to the 1.6% GDP revised growth rate for the second quarter. Thinking of future economic growth, economist Ed Yardeni, suggests three possibilities in a recent newsletter.

1) The contrarian view says the economy will boom. To generate a 3% growth rate, we would need more housing refinancing that would put money in consumer’s pockets and elevate consumer spending. Also, lower mortgage rates coud lead to more housing sales. Add to this solid corporate profits and higher real pay per worker because of productivity gain and you have a robust recovery. Most say the chances of a robust recovery are slim.

2) More and more people are concerned about a bust which takes us to the double dip scenario. The second dip would be caused by unimproved unemployment and plummeting consumer spending.

3) Muddling with ups and downs in different sectors is the third and most likely alternative. Muddling would be characterized by some employment gains, some housng improvement, some consumer spending.

A (trick) question: If the growth rate has moved from 3.7% down to 1.6% between  the first and second quarter of 2010, then has the economy contracted? The answer: No. The economy continues to grow but at a slower rate.

The Economic Lesson

Let’s think of a double dip as a “W”. The U.S. has experienced 2 double dips during the past 80 years. Looking between 1930 and 1940, economic activity contracted 1930-1933, expanded 1934-1937, dipped in 1938, and then steadily grew. A much faster double dip happened between 1980 and 1982. 1980/down; 1981/up; 1982/ down.

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