End of Depression or Beginning of Double Dip?

by: Howard Richman

At the moment, the U.S. economy is poised to exit the New Depression (Richard Duncan's name for the current depression), as shown in the graph below:

But last time the U.S. economy almost got out (1937), it fell back into a double dip and didn't leap out until 1941, as shown by the graph below:

Last year, 2010, was a lot like 1937. Consumption and business investment were growing, but government spending and net exports were stagnant. But in 1938, the U.S. economy fell back into depression as a result of a decline in consumption and business investment. It took a 13.92% increase in government consumption in 1941, related to World War II, to get the U.S. economy out. Here were the factors and their contributions to economic growth during those years:

Contributors to Real GDP Growth
Year 2010 1937 1938 1941
Consumption 1.25% 2.84% -1.22% 5.18%
Business Investment 1.97% 2.08% -3.35% 2.28%
Government Consumption 0.20% -0.92% 1.53% 13.92%
Net Exports -0.46% 0.12% 1.00% -0.71%
Residuals -0.21% 1.00% -1.41% -3.60%
Total 2.83% 5.12% -3.44% 17.07%

So, is the United States about to exit the New Depression in 2011? I doubt it:

  • Consumption. If house prices keep falling and imported oil prices keep rising, consumers may be forced to cut back.
  • Business Investment. If consumption is stagnant, there may be little increase in investment.
  • Government Consumption. Both the federal and state governments are being forced by voters to cut back this year.
  • Net Exports. Many foreign central banks are copying China's growth strategy, devoting at least 3% of their GDP to finance currency manipulations, so there may be little improvement in net exports.

Depressions are difficult to exit from. Businesses don't invest much unless they expect increased sales in growing markets. In 1941, government spending provided the shock that changed business expectations. But I don't see anything on the horizon that will do so in 2011.

My father, son and I have proposed something (a WTO-legal scaled tariff to balance trade) that could provide the positive shock needed to get the United States out of the depression. Anything that would substitute American production for imports and enhance American exports would open new markets for business investment and get the U.S. economy back to normal.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.