I’ve never been fully committed to the notion that we’re going to have a “double dip” — that the economy will slide back into recession. But it has been clear for a while that it’s a serious possibility, for two reasons. First, a large part of the growth we’ve had has been driven by the stimulus — but the stimulus has already had its maximum impact on the growth of GDP, will hit its maximum impact on the level of GDP in the middle of next year, and then will begin to fade out. Second, the rise in manufacturing production is to a large extent an inventory bounce — and this, too, will fade out in the quarters ahead.
Two stories this morning highlight the risks. The WSJ has a report on highway construction titled Job Cuts Loom as Stimulus Fades:
Highway-construction companies around the country, having completed the mostly small projects paid for by the federal economic-stimulus package, are starting to see their business run aground, an ominous sign for the nation’s weak employment picture.
Meanwhile, the ISM for manufacturing suggests that industrial growth is already slowing down.
I’d be more sanguine about all of this if there were any indications that private, final demand is taking off — consumers, business investment, whatever. But I haven’t seen anything suggesting that sort of thing.
The chances of a relapse into recession seem to be rising.
Did you hear that only a small percentage of the stimulus money has actually been spent? Is this true?
Dear Professor Krugman,
Under what circumstances would you consider advocating for price level targeting as recommended by Prof. Woodford, NGDP futures targeting as recommended by Prof. Sumner, or nominal wage targeting as recommended by Prof. Selgin?
Since the market’s expectations at the moment seem to be mildly deflationary, wouldn’t adopting any of these policies help break us free from our current liquidty trap, stabilize the economy, and prevent electoral issues in 2010?
Wow - I am so surprised that a handful of temporary shovel-ready band-aids didn’t fix everything. Oh well, back to the drawing board… what’s that? We had to sell the drawing board to pay for the escalation of an undeclared war against, um, against bad guys who hate us or something?
No wonder bears hibernate all winter…
Man, you’re such a bummer. Can’t you be more like those chirpy hosts on the MSNBC who tell us, without any apparent sense of irony, that now is a great time to start a business?
Thanks to total lack of intelligent central planning and all the disposable capital being disposed of by the likes of Goldman Sachs, in the parallel universe of derivatives, the USA is a ship drifting towards the shore in a mighty storm, powerless and rudderless, while Captain No Drama Obama stays in his cabin, moving fitfully his divisions in Afghanistan, to prove his coolness.
I would find it funny, had I a greater sense of humor, and were I not on the boat.
Really, what does Obama think will happen after doing exactly what his ethically perverse handlers at Goldman Sachs have recommended? Were not these people those who set up a conspiracy with AIG? Why are they not prosecuted? Because they are too big to fault?
Patrice Ayme http://patriceayme.wordpress.com/
Doctor Krugman, Thank you for your timely warnings and possible solutions to our Wall Street induced malaise. It’s almost unbearable to listen to the Republicans as they mislead people as to the real dangers caused by their very own incompetence as administrators of an economy which is dying right in front of our eyes. The silly rhetoric of: less taxes and less government is why we’re in this dire mess in the first place. Thank you again.
Mr. Krugman i have been unemployed for about 5months.i don’t receive government aid.[unemployment,welfare,food stamps etc.] i’m not paper educated but am skilled at my profession I cook , i do carpentry i farm.in my search for low wage and working class jobs this is what i have found.Now not only do you have to fill out a job application you also have to answer questionnaires i can only believe are psychological profiles. as if that’s not enough at the very end of these applications is a questionnaire that is voluntary but it gives the company hiring you a tax credit.so if you on on welfare receive food stamps or on unemployment or a veteran the company gets a tax credit.in other words if you don’t fall into these categories you are non existent in the job market.so i can only assume this is done to keep the unemployment figures down and also the # of people receiving gov aid down.I am not one to complain i come from a honest hard working family.I am now invisible and so are those whose unemployment has run out or can not receive it. i call us the cellophane people.I would do any job right now to have work it is frustrating to see what’s going on down here in the pits.your article on job creation touched me deeply.my family is getting by.this is the new America we need to wake up to the facts.thanks for your time glenn
The economy will continue to contract unti the domestic macroeconomic fundamentals are in sustainable balance. So the question is not whether the recession will be double dipped, but what is sustainable level of domestic debt, investment, government spending, etc. As you have noted in earlier articles, substituting public borrowing for private borrowing does not change the fact that the stimulus is borrowed money. If the amount borrowed is not sustainable based on present income and expected future income growth then, well, we are in trouble. The macroeconomy in the long run will adjust to a sustainable balance.
Wtih 3/4 of the stimulus not yet spent:
http://www.huffingtonpost.com/2009/11/30/stimulus-unspent-cbo_n_374729.html
I hope the WSJ is wrong, and that something productive will come from Thursday’s meetings - the WSJ is not an impartial source when it comes to tamping down enthusiasm for Obama.
If the President cannot get ‘capital’ to step up and do its part on Thursday, then the government should pivot to China & Japan for financing to do TVA-style infrastructure projects which can be sold off to private enterprise in later years.
China and Japan have dollars to re-cycle, and we have the same relationship to them that the TBTF’s have to the U.S. - since 70% of China’s foreign reserves are held in dollars, they are very vested in us thriving.
Hopefully the trip to China and Japan included some Treasury officials discussing these type contingencies.
btw - if the ‘capital strike’ continues after Thursday, it should be explained the country needs them and it is un-American to choose to sit on your hands in this time of need at home and when there are troops in the field in 2 different wars.
The President misses an opportunity this evening if he does not propose a way to pay for the war expansion, and removes from the table the Democrats’ fiscal point about Bush/Cheney financing war on the Chinese-backed credit card.
But I thought you said things looked great. 3 weeks ago…..
http://krugman.blogs.nytimes.com/2009/11/10/the-plural-of-anecdote-is-data/
Guess one of these posts will look smart a year from now!
Yes, Paul, the second dip is on the way. But, you see, we have a plan. We’ll replace Goldman, Sachs, at Treasury with Jamie Dimon, dump Bernancke from the FED, announce a non-existent jobs program, and all will be well across the land.
The expansions of the last two decades have been driven by 1) Tech (which was overly optimistic, to be sure, but actually served to change the playing field in the long run to an extent) and 2) real estate (which was largely insane, fueled by a combination of the cheap money required to keep things going at all and the fallout of the accumulation of capital in relatively few hands that had nowhere else to go).
It seems that the next wave — if there is to be one — would have to a case of serving the needs of the large swath of humanity that awaits emergence from penury. This only seems possible in a weak dollar, high tax, high wage environment that is anathema to those who hold the strings.
Even worse, if there is a second dip, there is every indication that the political will to take the necessary action to keep the economy as a whole from “circling the bowl” will be non-existent.
Let’s all work less and take more vacation. Why should we work 50 weeks a year, 5 days a week, 8 hrs a day when productivity has gone up so much over the last few decades?
Can’t we just work 40 hrs a year, 4 days a week, 8 hrs a day? And still manage the same standard of living or better?
Do we have to keep churning the wheels fast and still get no where?
Paul,
This article seems to be in direct contrast with reports today that nearly 3/4 of the stimulus money HAS NOT been paid out yet - were you aware of this at the time of writing?
Granted the stimulus money will only extend growth into a few more quarters which means the ‘recovery’ would still be on shaky ground as you state, but would those extra quarters of positive news not have a positive impact on consumer spending and investments as well?
Here is South Florida we are still reeling from the housing crisis, but I see public works projects & city improvements happening everywhere - new roads, bus stations, parks, schools, municipal buildings, etc. it seems like a lot is happening, which seems to only bode well for the economy as more government spending should = more contracting opportunities = employment, which seems to be the real key to a true recovery - no?
Jim Doyle Small Business Owner Coral Springs, FL
How is a war that could last until 2017 going to impact this situation? It’s going to be really expensive for years.
Based on the shipping boxes that I’ve opened from online purchases the last two months, I conclude that improvements in our economy have been a boon to China. Every product be it soft (sheets)or hard (electronics) has the Made in China label. We need the American jobs we have shipped to China. This is not jingoism, it’s the hard reality of the spot we have created for ourselves. I don’t hear a word from Wall Street or Pennsylvania Avenue that suggests change. They better move fast before the next dip comes and we become a bad credit risk for our main financier. FWR
It seems obvious why the industrial growth is slowing down. The US does not make anything, so there are no jobs. Perot was right when he mad the sucking sound about globalization.
What about those newsreports that most of the stimulus money hasn’t been spent yet?
“I'd be more sanguine about all of this if there were any indications that private, final demand is taking off "” consumers, business investment, whatever. But I haven't seen anything suggesting that sort of thing.”
Why should it happen? Private demand will only rise if the public has confidence in the economy. And it doesn’t. Why should it?
The economy will not take off until a new form(s) of wealth-generating (not money-generating) activity arises. This will happen when one or more of these things happens:
…The dollar sinks and more economic activity is sourced here in the states instead of China
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