How to Double Dip

15 january 2013

Here’s something that didn’t happen this year—a US double dip. (Nor was there a global one.)

However, some warn we’re not out of the woods: We could see a double-dip second leg in 2013.

Maybe there’s a recession in 2013, maybe not. And sure, 2013 is now just a year away—but making economic forecasts for the coming year is tough enough, nevermind another year out.

More important: How exactly are we defining “double dip”?

The last recession ended June 2009. If a new recession kicks in precisely January 2013, that’s three and a half years—42 months—the exact growth-cycle average since NBER started collecting data in 1854. It’s below average since 1945 (59 months). But an average is an average and bakes in a lot of variability. If three and a half years can be a growth interval in a double dip, then 2013 wouldn’t be a double dip at all, but the decaquintuple dip of the Great Depression.

Semantics? Not really. A double dip also implies the 2nd down-leg has root causes in what triggered the first dip. In economies and capital markets, a great way to miss what’s actually ahead is focusing on fighting the last war. The world looks very different now than it did heading into December 2007. Banks globally are overall better capitalized and keenly aware of the risks of a sudden liquidity event. We’ve (blessedly) killed the well-intentioned but misbegotten fair-value accounting rule (FAS 157) which exacerbated (and, some reasonably argue, perhaps caused) the 2008 credit crisis. Firms are sitting on a near-historic mountain of cash. Revenues have been accelerating for several quarters.

That’s not to say a recession is impossible. Risks to global growth exist—but they always always do. (A world without risks is one where you’re likely overlooking something—probably huge—about to wallop you in the face.) The eurozone likely continues to be a weak spot in 2012—but not a uniformly weak spot. Just as the world can be multi-speed, so can the eurozone. And mind, there’s historical precedence that even a fairly sizable region can be very weak or even fall into recession, and the rest of the world can be just fine. For example, in 1998 Asia was about 25% of GDP (about the size of Europe ex-UK now) and fell into recession while US and global growth was quite robust. The weaker 25% of the world can’t be a bigger negative than the larger, healthier 75% is a positive—particularly when that 75% has been accelerating.

Then too, expectations broadly are still for global growth in 2012. So why the continued double-dip mania? Historically, it’s common for folks to herald a double dip following a recession—even for years while the economy keeps expanding (as documented in Markets Never Forget, the book I co-authored with Ken Fisher, available now). That a double dip is a popular media meme doesn’t mean it’s likelier to happen. It just may mean there was a recession in the not-so-distant past. Or maybe not. Maybe we finally get that decaquintuple dip.

Markets Never Forget But People Do by Ken Fisher (CEO of Fisher Investments) and Lara Hoffmans is available now. Learn more about the book at www.marketsneverforget.com

This constitutes the views, opinions and commentary of the author as of December 2011 and should not be regarded as personal investment advice. No assurances are made the author will continue to hold these views, which may change at any time without notice. No assurances are made regarding the accuracy of any forecast made. Past performance is no guarantee of future results. Investing in stock markets involves the risk of loss.