To Dip or Double-Dip? . . . That is the Question.

To Dip or Double-Dip? . . . That is the Question.


The term “double dip” seemed to gain cultural relevance after a 1993 episode of Seinfeld, in which George Costanza is accused by his girlfriend’s brother of double dipping his chip at a family party.

Girlfriend’s Brother: What are you doing? . . .Did you just double dip that chip?
George: Double dipped? What are you talking about?
Girlfriend’s Brother: You dipped the chip. You took a bite . . . and you dipped again.
George: So?
Girlfriend’s Brother: That’s like putting your whole mouth right in the dip. From now on, when you take a chip, just take one dip and end it.

When you first read the words “double dip” above, I doubt that your first thought was Seinfeld or the faux pas of redunking your half-eaten tortilla chip in the community salsa. The term has taken on new meaning in the current economic environment. “Double dip” now means double-dip recession—a scenario in which an economic recession is followed by a brief period of recovery before sliding into recession again. To illustrate my point, over the past week alone, a Google News search on the term “double-dip recession” yields nearly 6,000 results.

How Realistic is a Double-Dip Recession?
Before we can examine how realistic the double-dip scenario is, first we have to define exactly what constitutes a double-dip recession. While recessions are officially established by the National Bureau of Economic Research (NBER) and have the standard rule-of-thumb definition of two consecutive quarters of negative GDP growth, there is no recognized definition of the double-dip version, official or not.

Considering that the average economic expansion since 1854 lasted approximately three years according to the NBER, a second recession would necessarily have to occur considerably fewer than three years after the previous one to be of the double-dip variety. Otherwise, it is likely just a new recession unrelated to the preceding one. So for the purposes of this article, let us say that a double-dip recession is one that begins no more than a year and a half after the previous one ends, meaning an expansion that is only half as long as the historical average.

Using that definition, there have only been five double-dip recessions out of 32 total recessions from 1854 to 2007. Of those five double-dip recessions, three began prior to the advent of the Federal Reserve System and coordinated monetary policy. The two “modern” double-dip recessions occurred in 1920-1921 and 1981-1982.

What is clear in studying these two modern double-dip recessions is that they appear to be man made, a result of the Federal Reserve raising the discount rate—the rate at which banks can borrow from the Fed—too soon and too high after the previous recession. At the outset of the 1920 recession, the Fed raised the discount rate from 4.75% to 6% in one move. During the brief twelve-month expansion that occurred between the recession of 1980 and the double-dip recession of 1981-1982, the Fed hiked the discount rate from 10% to 14% in four 1% increments. In both cases, the Fed tightened its monetary policy to reign in double-digit inflation.

The Current Situation
Obviously, the current economic situation is much different than the prevailing conditions at the time of each modern double-dip recession. The discount rate currently sits at 0.75% and has only been increased once (by 0.25%) since it bottomed at 0.50% in December 2008. On top of that, the Fed has shown no signs that it intends to increase it meaningfully in the near future. The reason they can keep the rate so low is because inflation is practically non-existent with a 1.1% year-over-year change in the Consumer Price Index as of August 2010.

It is clear that past double-dip recessions occurred in economic environments very different than the one we find ourselves in currently. As a result, we view the possibility of a double-dip recession in the United States as remote as long as the Fed doesn’t change its tune on monetary policy by raising rates quickly, a situation that seems even less likely than George Costanza developing social etiquette.

© 2010 Bell Investment Advisors, Inc.

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