US economy stares at a double dip

The double dip is not a dance. It is the time-honored tendency of the US economy to relapse into recession after a temporary recovery. Over the years, it has happened far more often than not. Notwithstanding frothy financial markets, which currently are discounting the nirvana of an uninterrupted V-shaped recovery, there is a compelling case for another double dip in the aftermath of the United States' devastating COVID-19 shock.

The daunting history of the US business cycle warns against complacency. Double dips－defined simply as a decline in quarterly real GDP following a temporary rebound－have occurred in eight of the 11 recessions since the end of World War II. The only exceptions were the recessions of 1953-54, the brief contraction of 1980, and the mild downturn of 1990-91. All the others contained double dips, and two featured triple dips－two false starts followed by relapses.

Severe downturn usually leads to another recession

The double dip does not, of course, come out of thin air. It reflects the combination of lingering vulnerability in the underlying economy and aftershocks from the initial recessionary blow. As a general rule, the more severe the downturn, the greater the damage, the longer the recovery, and the higher the likelihood of a double dip. That was the case in the sharp recessions of 1957-58, 1973-75, and 1981-82, as well as in the major contraction that accompanied the 2008-09 global financial crisis.

The current recession is a classic setup for a double dip. Lingering vulnerability is hardly a question in the aftermath of the 32.9 percent annualized plunge in the second quarter of 2020－by far the sharpest quarterly decline on record. Damaged as never before by the unprecedented lockdown to combat the initial outbreak of COVID-19, the economy has barely begun to heal. A sharp rebound in the current quarter is simple arithmetic－and virtually guaranteed by the partial re-opening of shuttered businesses. But will it stick, or will there be a relapse?

Financial markets aren't the least bit worried about a relapse, owing largely to unprecedented monetary easing, which has evoked the time-honored maxim: "don't fight the Fed". Added comfort comes from equally unprecedented fiscal relief aimed at mitigating the pandemic-related shock to businesses and households.