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Double dip economy Original Source Link: (May no longer be active)
http://story.news.yahoo.com/news?tmpl=story2&cid=568&ncid=749&e=1&u=/nm/20021116/bs_nm/column_stocks_week_dchttp://story.news.yahoo.com/news?tmpl=story2&cid=568&ncid=749&e=1&u=/nm/20021116/bs_nm/column_stocks_week_dc
Dark Side of Post-Bubble Economy
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By Pierre Belec
NEW YORK (Reuters) - Double dip may not only come on ice cream cones after all.
There are few bright spots in the economy. Adding to the despair is concern it could slip back into recession, the so-called double-dip variety.
For this reason, it may be difficult for the bulls to gain great traction.
What's disturbing is that many of the same economists who didn't predict a recession in 2001 and preferred to view the coming slowdown as more of a "soft landing," are now ruling out the risk the economy may again stumble. Although the economic numbers are changing, they're still not changing their minds.
"When everyone is thinking alike, no one is thinking very much," says Ray F. DeVoe Jr., publisher of the DeVoe Report, a financial newsletter. "The unintended message is they must be paid to be optimistic or have not done their homework."
History shows that recessions are like cockroaches. When you see one, there's bound to be another waiting in the wings. Recessions that began in 1957, 1960, 1969, 1973 and 1980 were all followed by an economic recovery prior to a second dip into negative territory, DeVoe says.
The latest data suggest that things are just not right in the $10 trillion economy. For that reason, some experts are revisiting the script titled "Recession Part II."
One bet is a double-dip could result from external events, such as further attacks on the United States or a long war in the Middle East that could spark a run-up in crude oil prices. Soaring energy prices have been the source of many of the past recessions.
ECONOMY AT STALL SPEED
Economic activity in the third quarter grew by 3.1 percent but growth appears to have since slowed considerably. Forecasts for the fourth quarter are being revised with some estimates calling for no growth at all.
A first-year expansion of 3.1 percent coming out of last year's recession would be the slowest since the bounce-back of 3.8 percent after the 1990-91 recession.
More troubling is that most of the third-quarter gain came from booming car sales. Excluding autos, the gross domestic product inched by at the stall speed of 1.5 percent.
A big drop of 27 percent in October car sales is sending red warning flags that America's love affair with Detroit's too-good-to-pass-up deals may be souring. After all, how many cars can Americans park in their two-car garages?
The issue is one of a lack of pent-up demand, which car makers need to re-ignite the next sales explosion.
The booming housing market, which some fear has replaced the stock market of the 1990s as the wealth provider, could also fall victim to this lack of re-ignition.
In order for the economy to stay above water, it will need a steady rise in consumer spending. A retrenchment could cut off the crucial oxygen supply needed to get business spending and the stock market back on their feet.
Indeed, the economy is at a dreaded transitory stage. Consumers are tapped out and weighed down by a mountain of debt. They've boosted their debt load to record levels and are spending more than they bring home. And, the home buying boom has been a bust for many people. A record number of homeowners are operating under bankruptcy protection.
If consumer spending falls and can't get back up, a double-dip recession cannot be ruled out.
The missing link in the economy is the lingering weakness in business spending.
Corporate America continues to keep its head in the sand, afraid to expand plants and hire more workers.
In fact the Business Roundtable, which comprises 150 chief executive officers from the biggest companies, found in a survey that a majority of its members expect to cut jobs next year and further delay capital spending in 2003.
While the 2001 recession turned out to be one of the mildest on record, it caused deep damage to corporate earnings. As a result, the CEOs' acceptance of risk appears to have been tempered by the current downturn in consumer confidence and the continued bear market on Wall Street.
So the economy could be headed for another slowdown and the Fed may not be able to do anything about it.
Stocks surged this month as the Federal Reserve (news - web sites) again came to the rescue of the economy by lowering interest rates after chopping away 11 times in 2001.
Yet, lower rates have not helped the stock market or the economy and it's worth asking why another dose of easy money should do the trick.
NO EASY TASK FOR FED
The Fed can influence some sectors of the economy but there are areas where it can have no control.
It can drive interest rates low enough to entice consumers to spend. But cheap money can have little impact on businesses because companies take a longer term view when it comes to spending. And their decisions to expand plants have a lot to do with demand for their products.
The most that can be expected from the rate cut is it will allow consumers to refinance their mortgages and the lower monthly payments will free up more of their cash to spend on stuff that will keep the economy from stalling.
Mortgage rates are the lowest in a generation. Cheap interest rates have spurred housing starts.
Fed Chairman Alan Greenspan (news - web sites)'s game plan is to "buy" more time until businesses finally kick in their share of economic support and begin to create new jobs.
Stephen S. Roach, chief economist for Morgan Stanley, says the magic of the Fed's economic stimulus, which has worked nicely over the last half-century, may not do the trick in this post-bubble economy.
"I fear that financial markets, which are basing future hopes on the traction of yesteryear, will continue to be disappointed," says Roach, who was the first to warn of the threat of a double-dip recession.
In a normal recession, the car and the housing markets collapse, creating what is known as "pent-up demand" as cars are not sold and homes are not built.
"Once the cycle turns and the lagged impact of lower interest rates starts to kick in, such pent-up demand is then typically released," Roach says. "As opposed to collapsing as they normally do in a recession, these sectors continued to expand briskly over the past year. As a result, there is no pent-up demand that now will get unleashed -- it has already been spent."
For the week, the Dow Jones industrial average rose 0.5 percent to close at 8,579, while the Nasdaq composite index jumped 3.8 percent to 1,411 and the Standard & Poor's 500 gained 1.7 percent to 910.
(Pierre Belec is a free-lance writer. Any opinions expressed are those of Mr. Belec.)
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