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ABOUT THE ONLY THING THAT HAS become clear in the debate about whether we will have a double-dip recession is that there is nothing even remotely approaching a consensus on how to define it.
Little wonder, therefore, that there is such widespread disagreement about the likelihood of one happening.
Consider, for starters, one of the most widely used definitions of a double-dip recession: It is quite broad, encompassing any two recessions that are interrupted by weak economic growth. And, because the current economic recovery does indeed appear to be quite weak, a double-dip recession would certainly appear to be quite likely.
The problem with defining double-dip recessions in this way, however, is that the definition is too broad. A majority of recessions in U.S. economic history would qualify, in fact, depending on how "weak economic recovery" is defined.
Those predicting a double-dip recession thus win a Pyrrhic victory if their forecast comes to pass only by so stretching the definition that a double-dip recession becomes unexceptional.
Still other economists define a double-dip recession by the length of time that transpires between the two recessions. A one-year time frame is often employed in this regard which, if adopted, does indeed make a double-dip recession quite rare.
Only one has occurred in the last 80 years, for example, according to the National Bureau of Economic Research (NBER), a commonly cited arbiter of when recessions begin and end in the U.S. The first half of this rare double-dip recession was the one that ended in July 1980, and the second was the one that began one year later, in July 1981.
The problem with this definition is just the opposite of the previous one: It is too restrictive. In fact, it almost certainly means that we will NOT have a double-dip recession this time around, since the current economic recovery is most likely already a year old.
To be sure, it's impossible to know for sure how old the current recovery is, since the NBER has not officially ruled on when the recession that began in December 2007 formally came to an end. But most economists feel confident that it happened no later than July of last year. Furthermore, the U.S. economy is almost certainly still growing, even if at a slower pace than earlier this year and in 2009. And any recession that happens after this month will automatically not qualify.
What, then, is all the "double-dip" debate about?
James Stack, editor of InvesTech Research Market Analyst, suspects that the debate is less about the objective economic facts of the matter and, instead, a reflection of the widespread skepticism that almost always greets nascent economic recoveries. "As market historians, we know the double-dip debate is a common occurrence in the first 12-18 months of economic recoveries," he wrote in the latest issue of his service.
Regardless of what we call it, what are the odds that the economy will enter into another recession in the near future?
Quite low, according to any of a number of econometric models with decent track records at predicting past recessions.
Perhaps the one single indicator that is part of virtually all econometric forecasting models is the yield curve—the difference between the interest rates on longer-term and short-term Treasuries. Normally, those rates rise as maturities increase, but on occasion the relationship is just the opposite—a condition known as an inverted yield curve. Many economists consider a steeply inverted yield curve as a reliable indicator that a recession will occur in 12 months' time.
What is the message of the yield curve right now? Because it is steeply upwardly sloping, it is at the opposite end of the spectrum from being inverted—and therefore giving very low odds of a recession.
Consider one famous econometric model based on the slope of the yield curve that was introduced more than a decade ago by Arturo Estrella, an economist at the Federal Reserve Bank of New York, and Frederic Mishkin, a Columbia University professor who was a member of the Federal Reserve's Board of Governors from 2006 to 2008. The New York Federal Reserve Bank's Website has a page devoted to the model, and it currently is reporting the odds of a recession in the next 12 months at a minuscule 0.12%.
To be sure, with short-term Treasury yields close to zero because of the flight to quality away from Europe's sovereign debt crisis and the Federal Reserve's monetary policy, it would be virtually impossible for the yield curve to invert right now. But I wouldn't be too quick to dismiss the message of the yield curve, either: A similar message emerges from a separate yield curve based on corporate bond yields, and those yields are not directly affected by a flight to quality.
The bottom line? A "double-dip recession" appears to be extremely unlikely, unless it is defined in such liberal terms as to make it unexceptional.
And though, as Stack puts it, "the word 'never' is inappropriate to use in economic forecasting circles," there would appear to be lots of other things of greater legitimate concern right now to investors than a recession in the next 12 months.
Email: online.editors@barrons.com
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