Sunday, May 16, 2010

Shiller on a Double Dip Recession

by Bill McBride on 5/16/2010 08:51:00 AM

Professor Shiller is worried about social psychology (I tend to be much more data driven).

From Robert Shiller in the NY Times: Fear of a Double Dip Could Cause One

[T]here is still a real risk of a double-dip recession, though it can’t be quantified by the statistical models that economists use for forecasts. Instead, the danger stems from the weakness and vulnerability of confidence — whose decline could bring markets down, further stress balance sheets and cause cuts in consumption, investment and local government expenditures.
...
From 2007 to 2009, there was widespread concern about the risk of an economic depression, but that scare has been abating. Since mid-2009, it has been replaced by the milder worry of a double-dip recession, as a count of Web searches for those terms on Google Insights suggests. And with that depression scare still fresh in our minds, sensitivity to the possibility of another downturn remains high.

Shiller continues:
I use a definition of a double-dip recession that doesn’t emphasize the short term. Instead, I see it as beginning with a recession in which unemployment rises to a high level and then falls at a disappointingly slow rate. Before employment returns to normal, there is a second recession. As long as economic recovery isn’t complete, that’s a double-dip recession, even if there are years between the declines.
It helps to have a clear definition of a "double-dip" as opposed to calling two separate recessions. The two early '80s recession raised this issue, and the NBER argued they were two separate recessions:
Although not all economic indicators had regained their 1979-80 peaks by the summer of 1981, the committee agreed that the resurgence of economic activity in the previous year clearly constituted a business cycle recovery.
Using Shiller's definition, the two recessions in the '30s were a "double-dip", although NBER called them as two separate recessions.

My definition of a "double-dip" is a second economic downturn before most of the major indicators return to the pre-recession levels. These measures would include GDP, real income, employment, industrial production, and wholesale-retail sales. My view is the economy will probably slow in the 2nd half of 2010, but I think we will avoid a double-dip.

And this is interesting:
Since 1989, I have been compiling the Buy-on-Dips Stock Market Confidence Index, now produced by the Yale School of Management. It shows that confidence to buy on market dips has been declining steadily for individual investors since 2009. (The measure is holding steady for institutional investors.) Will individuals continue to support the market, which is now highly priced?