I keep repeating that the debate over a double dip is meaningless. Why? Because we’ve been in one long balance sheet recession this entire time. So, a good way to think about this is to think of the U.S. like a boxer. We were knocked flat on our back in 2008 and have since struggled to one knee. We never got back to our feet though. So these conversations that imply we might be on the verge of falling down again are rather pointless. Sure, we might fall down again, but we already have one knee on the canvass! The point is, with this much slack in the economy, it’s unlikely that any economic downturn from here will be substantial. Does that mean I think the U.S. economy can’t contract from here? No, but I would be very surprised if we were to experience another blow similar to the 2008 recession where real GDP fell 5%.
To put this argument into some perspective, analysts at ING tend to agree. They see the economy as muddling through, but not collapsing. They cite 5 reasons for this perspective:
- “Cyclical sensitive sectors, namely the housing sector and the auto sector, are already weak and are unlikely to contract much more.
- Households’ balance sheets have improved since the global financial crisis. Lower rates over a considerable period of time benefit net borrowers. Most US households will benefit from low borrowing rates.
- The trade deficit is likely to narrow due to slower import growth, decline in energy and commodity prices and a weak trade weighted dollar.
- Decline in commodity prices will check headline inflation and could lift households’ purchasing power.
- Investors’ fears are based on their most recent experience. The unpleasant memories of the global financial crisis are biasing investors’ sentiments. ”