Together with the travails of debt-ridden Euro economies, the imminent prospect of a double-dip recession in the US – that accounts for 23 per cent of global GDP – is bound to trigger a nasty, brutish and prolonged slump in the world economy. Fear and panic have gripped stock markets in a bear hug as the US economy’s recovery from the recession that began in December 2007 is showing signs of flagging. Nothing can dispel the blues that another dip is in the offing as the ranks of the jobless keep rising.
The threat of a double-dip recession is real. With the revisions in US GDP growth estimates, the current pace of expansion is a flat 0.7 per cent a year during the first half of this year that indicates the rebound has been much less robust than was thought earlier. That output has also not returned to the level attained before the recession was mentioned by US Federal System Chairman Ben Bernanke in his address to the Federal Reserve Bank of Kansas City’s economic symposium at Jackson Hole, Wyoming.
What is a double-dip recession? The popular impression is that it is W shaped: recession followed by a weak recovery and another recession like in 1980 and 1981-82. But the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) does not recognise such a recession. They are the high priests who determine when the US economy enters a cyclical downturn and rebounds from it. According to them, the recession can be dated to December 2007 and the recovery process started 18 months later.
This committee believes that two periods of contraction will be either two separate recessions or parts of one recession. They took their time in announcing in September 2010 that the trough of the longest recession since World War II was reached in June 2009. Economic activity is typically below normal in the early stages of expansion and it sometimes remains so later on as well. They felt that any future downturn would be a new recession than a continuation of the one that set in from December 2007.
However, a double-dip is highly probable because the US economy has recovered much less than was considered even by the NBER. The recent behaviour of the US labour market is a case in point. The worker-population ratio, which measures the share of adults who are employed, was 63 per cent before the recession of 2007 struck. Eighteen months later, it declined to 59.4 per cent in June 2009 — when the R-word officially ended. The latest number shows an even further drop to 58.1 per cent in July 2011.
The recovery process obviously hasn’t extended to the employment front. And unlike the latest 2009-10 Indian data of the National Sample Survey Organisation, falling levels of employment are reflected in higher rates of unemployment to 9.1 per cent in the US. All the evidence is also pointing to a rise in the number of those who are unemployed on a long-term basis of more than a year. And if the underemployed in the US economy are factored in, the employment deficit is closer to 16 per cent.
In this milieu, economists like Paul Krugman ask where is the economic recovery supposed to come from? The vast numbers of unemployed and underemployed are bound to dampen consumer spending. US consumers in any case are burdened by housing debt. Businesses are also unlikely to invest given the lack of consumer demand. The deficiency of aggregate demand is, therefore, likely to weaken any incipient recovery and set off another dip in US economic activity in the coming months.
The gloomy tidings of another economic contraction, thanks to the slackening pace of employment is supported by a recent study by E J Reedy and Robert E Litan titled “Starting Smaller; Staying Smaller: America’s Slow Leak in Job Creation” for the Ewing Marion Kauffman Foundation. Indicative of a longer-term trend is the fact that start-ups created 3.5 per cent of US jobs annually in the 1980s. This shrank to 2.6 per cent during the 2000s, according to US Census Bureau numbers.
The shrinking job creation of US start-ups is important, because this is the difference between positive and negative overall net job growth. Conventional wisdom only focuses on jobs being created by big companies. But new businesses are vital to the labour market since they generated around 3 million new jobs every year before the recession struck in December 2007. But firms born in 2009 created 2.3 million jobs or 700,000 jobs below the recent historic norm.
The slackening pace of job creation in US start-ups is also reflected in per business numbers that show new establishments generated a peak level of 10.4 jobs on the average in 2002, which declined to less than eight in 2009. The pullback by start-ups, the nation’s most critical source of job creation, together with the grim tidings of long-term unemployment; the persisting downtrend in worker-population ratios, will further weaken what has been a tepid recovery and clear the decks for a double-dip recession.
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