Hold on to your hat. We may be headed for a double-dip recession. In fact, when more current economic data arrives a few months from now, it may turn out that we’re already in one, according to a pair of economists at Moody's Capital Markets Research Group.
“We are in a very perilous situation,” Moody’s Chief Economist John Lonski told On Wall Street in an interview Friday.
"What scares me is that, because of the weakened condition of the federal government, there is less confidence in the philosophy of 'too big to fail'-- the idea that the government will come in and back up any financial company that runs into trouble -- so in case of a renewed recession, you could see a contraction of financial liquidity that could be even more serious than what caused the collapse of Lehman Brothers," he said.
Lonski and his colleague at Moody’s Capital Markets Research Group, economist Ben Garber, just released a new report titled “Double Dip Risk Rises as DC Standoff Continues,” in which they warn, “The U.S. may be closer to a double-dip recession than commonly thought.”
They note that the U.S. economy “continues to soften,” and said that evidence of a recovery in the second half of this year is “proving elusive.” And that’s “assuming a reasonable resolution of the debt standoff” between Republicans and Democrats in Washington and, increasingly, even among Republicans themselves.
"Even with a market-friendly resolution of the debt standoff, a double-dip recession is far from unlikely," they wrote in the report.
As the Moody’s report was released, so too was new and pretty gloomy data from the U.S. Commerce Department. The new government data show that growth in the last quarter of 2010 was actually running at an anemic 2.3% annual rate, not the more robust 3.1% rate initially reported.
Annualized growth rates for the first and second quarters of this year were also revised downward to 0.4% and 1.3% respectively. As Ryan Sweet, a senior economist at Moody’s Analytics put it, “The economy essentially came to a grinding halt in the first half of the year.”
Lonski and Garber said that at present it is hard to find any good news, with regional manufacturing statistics “hinting of stagnation” and the housing market still unable to “find a bottom.”
They also note that the Chicago Federal Reserve’s National Activity Index (CFNAI), in its latest three month moving average for the last quarter, registered -0.60. They warn that in five of the last nine times the CFNAI fell to this low level “recession was often impending, or was already present."
Furthermore, they said that the U.S. cannot expect much help this time from the rest of the world, which is also experiencing a slowdown in growth -- though not as severe as the U.S.
A big concern among many economists is that politicians in Washington, focused as they are now in both parties on cutting the budget deficit, could make things worse.
Noting that Britain’s new Conservative Party-led government responded to a debt downgrade warning by slashing domestic spending and bringing on a double-dip recession, Lonski says, “Even [Fed Chairman] Ben Bernanke has said it’s very important not to bring on budget cuts until we can be reasonably certain that the U.S. economy is self-sustaining.”
Many politicians these days, in what Lonski said is “political theater,” are calling for immediate cuts in social spending programs like Social Security, Medicaid, welfare and education -- among others -- but he said, “the problem with the U.S. budget is not what is being spent now, but what will be required when the Baby Boom population is all in retirement.”
The irony, he noted, is that if government inaction on raising the debt ceiling, or on overly-aggressive near-term budget cutting, helped usher in a double-dip recession, it would have the perverse effect of worsening the debt as tax receipts would plunge.
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