Predicting Double Dips: Bad Induction

by: Dean Baker

David Leonhardt does some seriously bad induction when he tells readers that:

Over the last 50 years, every time that job growth has been as meager as it has been over the last four months, the economy has been headed toward recession, in a recession or in the immediate aftermath of one.

The problem in this story is that over most of this period, the underlying rate of labor force growth was close to 2 million a year. It currently is around 1 million a year. The reason for the falloff is that the baby boom cohort is now retiring in large numbers and also there is little room for women's labor force participation to increase. Therefore we should be expecting a considerably lower rate of job growth.

The other problem in this picture is that a recession requires some component of spending to go into reverse and turn negative. In the past, it had always been housing and car buying which fell at double-digit rates at the start of a downturn. With these categories of spending already very low, there are few obvious candidates.

Government spending has been falling, but this has been at around a 2 percent annual rate. This is a drag on growth, but a sector comprising 20 percent of GDP shrinking at a 2 percent annual rate will not throw the economy into a recession.

The one plausible cause of a double-dip would be a collapse of the euro followed by another Lehman-type freeze up on the financial system. While this could certainly lead to a second recession, the causes will be found in the failures of Euro zone politics and the ECB, not an analysis of the U.S. economy.