A Double Dip Recession May Be Inevitable

A potential double dip recession was a large concern a year and a half ago. There was a belief that the deep economic downturn of 2008 and 2009 could not generate enough momentum for an even modest recovery. Then, the unemployment rate started to fall, car sales began to rebound, same-store retail sales improved, corporate earnings moved higher and fuel prices dropped. The comeback was confirmed by a strong holiday sales season last year and fourth quarter GDP rose 3.1%. Unemployment has fallen below 9% much sooner than most economists believed it would.

It has only taken a few weeks, but the chances of a double dip recession have increased. The term is mentioned more often in the media and in speeches by economists. Several large companies have said that their margins and sales may be hurt by inflation.

There are a relative small number of reasons that the economy has begun to slow and most of these have worsened quickly. This 24/7 Wall St. analysis looks at each one, explains how its trajectory and momentum has changed this year, and how it could derail the economic recovery.

1.       Wages

Wages fall behind inflation. The Labor Department said that real wages fell in March, the fifth straight monthly dip. Inflation has risen sharply at the same time.  Retail prices may not have spiked yet, with the exception of gasoline, but businesses will have to start to pass along the rising costs of their raw materials to their customers. People cannot afford to maintain the lifestyles that they could just six months ago.

2.       Real Estate

Real estate prices could fall another 10% this year. Real estate guru Robert Shiller, the creator of the Case-Shiller index, said that home prices could plunge as much as 10% to 25% before the market bottoms. That would have several effects if it happens. The first is that the number of mortgages which are underwater could rise by the millions. Most estimates are that 11 million home loans are worth more than the properties they  are underwriting. Desperate homeowners who cannot afford their mortgages will find it harder and harder to sell, particularly if they need to pay a bank the difference between loan value and home value at the close of a sale. Long-term home owners who bought their houses before 2000 can still hope to have some real estate equity when they retire. Home price attrition would kill that hope and with it the belief many have that they can fund their retirements. Concerns about future income shortfalls almost always hurt current consumer spending.

3.       Unemployment

Long-term unemployment has not improved. The number of people in the US who have been unemployed is more than 4 million by most estimates. If individuals who have stopped looking for work are included, the figure would be much higher. The longer people are out of work, the more likely that they will exhaust their financial resources. If that happens, they need to rely on family or private charities for basic support such as food, clothing and shelter. Obviously, people with no income are not consumers. The problem is broader than that. Families which care for unemployed relatives have less discretionary income to spend on themselves.