David Leonhardt writes today about growing fears that the economy may enter outright recession again in the next year. Is this possible? Sure.
Government spending is contracting, the trade deficit could well rise (especially with so many of our major trading partners growing slowly or outright shrinking themselves) and, most importantly, there’s no particular reason to think that consumer spending can’t go into outright reverse. For example, the jump in the personal savings rate from around 2 percent to 6 percent was a key driver of the recession – households began saving more as their housing wealth evaporated after the bubble’s burst, and the cutback in spending that is the flipside of increased saving sapped demand from the economy and contributed to the recession.
Today this savings rate sits at 5 percent – and that’s hardly a sure upper-bound on personal savings – we’ve seen rates well over twice as high for long periods of time before. Who knows what the real, non-bubble rate of personal savings is going to shake out to be?
All this said, I don’t think that an outright double-dip is nearly the most likely scenario for the next year. Is this a rare outbreak of EPI-optimism on the economy? Nope. As our president Larry Mishel pointed out yesterday, forecasts for unemployment a year from now predict essentially no change. We should expect, absent a big policy change, the same 9-point-whatever percent unemployment then as we have now. And this is the non-recessionary prediction!
The most likely scenario, while not an outright double-dip, is sluggish growth that is far too slow to put a real dent in joblessness; zero is not the magic number signifying when you should start worrying about economic performance.
You should have started worrying a long time ago…