5 Signs of a Double-Dip Recession

Bank of America economist says Washington increased probability of a double dip.

ByABC News
August 1, 2011, 1:41 PM

Aug. 3, 2011 — -- intro:

Though Congress forestalled a default on the country's debt obligations, the faltering stock market and several recent economic indicators are causing economists to worry about a "double dip" recession.

Ethan Harris, Bank of America Merrill Lynch economist for North America, said he sees a 20 to 30 percent probability that the country will enter a recession sometime in the next year.

"The odds of a double dip are rising," Harris told ABC News. "The sad thing is that with more effective policy in Washington the risk of recession would be much lower."

Critics of this week's debt deal say the spending cuts will do harm to an already fragile economy.

Last Friday, the Bureau of Economic Analysis said the economy expanded at a disappointing 1.3 percent annual rate in the second quarter after barely growing during the first quarter. In the first quarter, real GDP increased 0.4 percent.

The most recent recession, technically described as at least two consecutive quarters of negative economic growth by economists, officially started December 2007 and ended June 2009.

Here are five signs that together show a double dip recession could be closer than you think:

quicklist: 1.title: Unemployment text: The labor market has been one of the most significant sore spots on the economic recovery, said Ed Kashmarek, economist with Wells Fargo. Some 25 million Americans are out of work and unemployment rates remains stubbornly high.

Payroll company ADP reported that the private sector added 114,000 jobs in July, far short of what's needed to get the job market moving again.

"Today's report shows modest job creation for the month of July at a rate of half what is needed for meaningful employment and economic recovery," Gary C. Butler, chief executive officer of ADP, said in a statement.

The construction sector lost 11,000 jobs while manufacturing and financial services were nearly flat with losses of 1,000 each.

ADP's report comes ahead of July's unemployment figures which the Bureau of Labor Statistics will announce on Friday. June had a dismally low number of jobs added, 54,000, leading to an unemployment rate of 9.2 percent.

Kashmarek said he anticipates the government spending cuts passed this week will take a bite out of federal jobs.

"The government is being scaled back at all levels. It was state and local government before but now we will see it at the federal level in next six months to a year, if not sooner. "It depends when cuts will be instituted."

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quicklist: 2. title: Pullback in stock market text: Kashmarek said the drop in the stock markets in the past two weeks is another indicator of a double-dip recession.

"It's a leading indicator historically because stocks are looking at future expected profits for companies," he said.

Kashmarek said the S&P 500 index is the broadest look at the equity markets and on Wednesday, it was headed for its eighth consecutive day of dropping.

And with the pullback in stocks there has been increase in Treasury prices which has pushed down their yields. The 10-year yield has dropped 60 basis points in the last month, which Kashmarek said is a significant decline.

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quicklist: 3. title: Real wage growthtext: With relatively higher gas, commodity and food prices, real wage growth has declined. June's jobs report showed a 0.1 percent drop in wages.

Add inflation and that stalls real wage growth. That's problematic for a country in which consumption comprises 70 percent of GDP.

"If input costs are rising faster than selling costs than that's not good for stock markets and the economy," Kashmarek said.

On Tuesday, the Commerce Department reported consumer spending fell 0.2 percent in June.

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quicklist: 4. title: Factory orderstext: Kashmarek said factory orders demonstrate how much businesses are willing to invest their capital, which has a ripple effect on workers they hire and spending across the economy.

"Many businesses have capital now," Kashmarek said. "If they're not willing to invest in an era with low interest rates, a lot of cash on balance sheet and tax incentives, then that's a problem."

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quicklist: 5.title: Consumer confidence text: The Conference Board's Consumer Confidence Index, which had declined in June, improved slightly in July, but that was after an eight month low. Harris said a number of combined global affects are increasing the risk of a recession.

"The economy was already suffering the after-effects of the Japan crisis and the rise in gasoline price at the start of the summer," Harris said. "Now the debt crises in Europe are adding additional shocks to confidence."

Harris said he hopes and expects that as these shocks abate there will be a moderate pick-up in growth.

"However, the risk of a recession is high," he said.

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