The Recovery Is Real

In the past month, several unfortunate phrases have joined the lexicon, including “top kill,” “Gore divorce,” and “double-dip recession.” On the Today show on May 21, CNBC’s volatile James Cramer increased his odds of the economy’s suffering a relapse from 25 percent to 35 percent. At a mid-May investment conference, Robert Arnott, chairman of money manager Research Affiliates, predicted that “there’s a better than 50 percent chance that we will see a second dip in the economy.” Google searches for “double-dip recession” have spiked.

And why not? GDP grew at a 3 percent rate in the first quarter, down sharply from 5.6 percent in the fourth quarter of 2009. The Conference Board Leading Economic Index (LEI) fell in April by 0.1 percent, the first downturn since March 2009. The debt crisis that began in Athens is threatening to tear the euro zone asunder. (Beware of Greeks bearing rifts!)

But if you want a double dip this summer, you’ll have to go to Carvel. “The scenario in which there is a double dip is fairly remote,” says Joel Prakken, managing director and cofounder of Macroeconomic Advisers, the St. Louis–based consulting firm. “I just can’t really see it happening unless there is an extreme crisis of confidence.”

To a degree, the crisis of confidence that began in the summer of 2008 never really ended. And that accounts for a chunk of the concern over a double dip. Our muscle memory impels us to extrapolate a few bad data points into a debacle. Think of how the meaning of an engine backfiring in lower Manhattan changed after September 11. Every time we see a punk housing number, a European government wobbling, or a sickening 1,000-point flash crash, our minds fly back to September 2008—and we imagine the worst.

The tapering off of GDP growth is natural as recoveries mature. We live in an age of long expansions—the past two have lasted 120 and 92 months, respectively. But a chart showing quarterly GDP growth presents a saw-tooth pattern. The business cycle proceeds less like a professional runner tackling the New York City Marathon who ticks off each mile at a steady six-minute pace, and more like your author, who tore through the first half at a seven-minute pace, bonked in the Bronx, and rallied toward the finish line. “You always have a spurt in growth out of recession and then you throttle back,” says Lakshman Achuthan, managing director of the New York–based Economic Cycle Research Institute, which specializes in the internal dynamics of business cycles. ECRI’s long leading indicators, says Achuthan, show a decline in the growth rate. “But we’d need to see a pronounced, pervasive, and persistent decline in the level of the leading indicators to start talking about recession risk.”

Ken Goldstein, economist at the Conference Board, which publishes the LEI, concurs. Yes, the index, whose components include unemployment claims, building permits, stock prices, and the average workweek, fell in April. But that’s coming off a very strong 1.2 percent gain in March. And Goldstein sees the moderating pace of growth as a bullish sign; a look inside the index shows the recovery is broadening from the industrial sector into the larger service sector. Rather than giving weight to financial markets—which, he jokes, have forecast 10 of the last two recessions—well-informed consumers should pay attention to jobs and consumer-spending data. “For a double dip to happen, you’d need a steady drumbeat back down in labor markets and consumer markets—a minimum of three months.”

In 2008 we learned that unexpected shocks can stun the economy into dead calm. Prakken of Macroeconomic Advisers says Europe’s banking and sovereign-debt woes could wash up on U.S. shores in the form of falling exports and a strengthening dollar. But they have the ability only to cut into growth in the coming year, not to derail it. Macroeconomic Advisers is forecasting economic growth of 3.7 percent for both 2010 and 2011.

The concern about a double dip is largely a function of what I’d call residual bearishness. Stung by excessive optimism in 2007, the econo-pundit community remains in a reflexive, dour crouch. Since it began in the spring of 2009, this recovery has been widely disbelieved and dismissed. Fretting about the double dip is as much about where we’ve been as where we are.

Daniel Gross is also the author of  Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation and  Pop!: Why Bubbles Are Great For The Economy.