Defining Double Dip

Story Highlights:

• A recent survey of economists was interpreted as showing increased expectations for a double dip.
• But the same survey showed uniformly positive economic growth forecasts.
• True double dips are in fact rare in history—something investors should consider.

A recent survey of 27 economistsshowed lowered forecasts and increased expectations of a double-dip recession.

Not a happy outlook, except, in looking at the actual survey results, every single economist forecasted positive Q2 growth—expectations ranged from 1.3% at the very lowest to 3.2% at the high end. What’s more, every one forecasted positive full-year 2011 growth and, most of them, accelerating growth in 2012.

Which is a touch confusing. Because positive growth isn’t a recession and certainly isn’t a double dip.

Perhaps the problem is a misunderstanding of what a double dip is. The National Bureau of Economic Research (NBER) is the body charged with officially dating recession start/end dates. They define a double dip as . . . nothing. It’s not defined. Nor do they identify one. Double dip in that sense is rather like “stagflation”—a word without official definition that can therefore be broadly applied (or misapplied).

In truth, when looking at economic cycles, true double dips are quite rare. Most people understand a double dip as a recession, a short period of growth, then a new recession. But what’s an appropriate intervening double-dip growth period? Let’s use 12 months to start: There have been three in US history since 1854. The two recessions starting January 1980 and July 1981 qualify—12 months between.

Before that, the most recent US double dip was . . . not the Great Depression. The Great Depression was two distinct recessions. The first started August 1929 and ran 43 months—way above average. Then we got 50 months uninterrupted growth. The average expansion since 1854 was 42 months—that expansion was also above average. Overall a miserable period—but not one long period of stagnation and not a double dip.

Prior to 1980, you must go back to August 1918—a 7-month recession (short), 10 months of growth (short), then an 18-month recession starting January (average-ish). And before that, starting in 1910 there was a 24-month recession, 12 months of growth, and a 23-month recession starting January 1913. Monetary policy was just miserable, or rather, non-existent before the Fed was created 1914, hence we had more recessions prior (bank panics too). And before that—none. No (12-month) US double dips.

Let’s review. Two double dips fast on the heels of one another pre- and early-Fed. And another starting in 1980—which was followed by a near decade-long expansion and bull market, then near repeat in the 1990s, so the double dip wasn’t long-term harmful for stocks or the economy. Three double dips in 33 cycles—a 10% occurrence.

Let’s expand to 18-month intervals. That adds two more double-dips. The last started in 1893. The one before was 1865. Both pre-Fed.

Keep in mind, the current expansion started June 2009, and expectations are for 2.5%-ish growth for Q2 (we’ll know at the end of July). That’s 24 months without a new recession. Then, too, no one in the survey predicted negative growth for the balance of 2011, and that’s corroborated by other major forecasting bodies (IMF, OECD, etc.)—so if those predictions hold true, we’ll be at 30 months. Beyond this point, it’s fair to say a recession would be a new recession, not a double dip. It’s a technicality—but considering global growth has been fine this year, and projected (by the IMF) to be 4.3% in 2011 and 4.5% in 2012, a recession (new, double dip, or otherwise) looks still less likely. It’s very hard for the world to go one way and the US another.

A double dip can happen at any point in the future, but like the joke about economists predicting 11 of the last 3 recessions, they are in reality rare. Rare enough for investors to at least be skeptical when they’re broadly predicted. And investors should be still more skeptical if predictions for a double dip are coupled with forecasts of perfectly fine, positive growth.