Double Dip More Likely. Pressure on Fed Rises
Policy + Politics

Double Dip More Likely. Pressure on Fed Rises

iStockphoto/The Fiscal Times

A string of dismal economic data has economists talking more loudly about a double-dip recession and investors scurrying for the safety of cash and Treasuries.

Unemployment applications last week crept up above 400,000 for the first time since April, rising 9,000 to a seasonally adjusted 408,000. Consumer prices rose a disturbing 0.5 percent in July, according to the Labor Department, with energy prices up 2.8 percent, clothing prices 1.2 percent, and food prices 0.4 percent.

Existing home sales, meanwhile, fell 3.5 percent in July to an annual rate of 4.67 million homes—a figure lower than 2010’s 4.91 million figure which was the weakest sales figure in 13 years.  Finally, the Philadelphia Federal Reserve Bank reported its business activity index—which covers factories in eastern Pennsylvania, Delaware, and southern New Jersey-- dropped to minus 30.7 from positive 3.2 the month before. 

“A day like today certainly continues to underscore the risk that a double-dip recession is very high,” says Diane Swonk, chief economist at Chicago-based Mesirow Financial.  

Unlike a few months ago, when most economists were predicting a sharp upturn in economic activity in the second of the year, economists contacted by The Fiscal Times today said recent economic data suggested a double-dip recession has become a palpable risk. They also agreed that the nation’s housing and jobs slumps are likely to persist into the fall and winter. On the other hand, they suggested inflation will stabilize next month, while the jobless claims figures could reverse themselves as quickly as next week.  

“What probably happened was that with all the volatility in the markets, businesses just kind of froze,” says Jay Bryson, a global economist at Wells Fargo.  He described the Philadelphia Fed’s report as the “ugliest” number out today and worries that it could signal market-fueled business paralysis in other areas of the country.

“If this trend spread to other districts, and businesses froze like that, the economy could be in major trouble,” he said. “I don’t think we can blindly dismiss this one out of hand.”  He did dismiss the weekly jobless claims increase from 399,000 to 408,000 as “part of the weekly noise” that is characteristic of a weak economy. 

According to Swonk, the absence of the first-time homebuyer tax credit, which expired in April 2010, is dragging down the housing market.  But a backlog of pent-up demand for homes combined with a decreased ability to obtain a mortgage adds another layer of dysfunction to the housing market, she says.

“It’s getting more difficult to get a mortgage, particularly with the regulations coming down the pike this fall and into 2012,” Swonk says, referring to restrictions in the Dodd-Frank financial reform law restricting banks from underwriting certain high-risk mortgages.  “With mortgages, we’ve got affordability, but the reality is that it helps on the margin, but if you can’t get your 20 to 30 percent down payment squared away, then you can’t qualify no matter now low rates go.”

“Ben Bernanke can make interest
rates go to zero, but until this Super
Committee goes to task, it wouldn’t
surprise me if nobody gets hired.”

The heightened inflation reflects rising apartment rental prices that overpowered the August drops in gasoline and energy prices , economists said.  “It’s impossible to expect sustained inflation when 16 percent of the country is underemployed,” says Mark Dotzour, chief economist at the Real Estate Center at Texas A&M University.  “There’s no wage pressure.  So if gasoline prices go back up to $4 and you don’t get a pay raise, that’s not going to create sustained inflation.  That just means you’re going to spend more of your money at the gas pump and less of it at Ann Taylor.”

According to Bryson, inflation will moderate over the next month, simply due to the fact that energy and oil prices have come down by almost $20 a barrel over the last two months.  “It was a big surprise that energy prices went up as much as they did but oil prices will make that retreat over the next month,” He says. 

Economists are as divided as the nation’s politicians regarding which policy tools to use to turn the economy around. Dotzour says the onus is on the federal government to hammer out a deficit reduction plan to give the business community more certainty over taxes and hiring.  “This has nothing to do with the cost of money and everything to do with a complete fear of government in the business sector,” he says. “Ben Bernanke can make interest rates go to zero, but until this Super Committee goes to task, it wouldn’t surprise me if nobody gets hired.”

Swonk suggest that the Federal Reserve’s meeting in Jackson Hole, Wyoming, next week, the central bank could send a signal that itis once again preparing to intervene by expanding the money supply. “We really need the Fed to step in [with a third round of quantitative easing] to stabilize financial markets,” she says, “and next week’s meeting will be quite important and revealing in that regard.”