The Federal Reserve joined a growing chorus of observers predicting a slowdown in the U.S. economy toward the end of the year, according to reports of its latest meeting released Wednesday. And chatter about the odds of a double-dip recession is on the rise.
Investors, meanwhile, are struggling to reconcile reports that keep pointing to souring economic growth with the relatively strong results posted by a handful of companies, such as Intel (INTC) and JPMorgan Chase (JPM), as earnings season gets into full swing and markets rebound from sharply oversold levels.
Given this push-pull, stepping back to put things into perspective would be a wise move.
Concerns Overstate the Actual Probability
For starters, talk of a double-dip recession seems to always far outweigh its actual probability. And already-hurt workers and investors can't help but give it a bigger share of their mind than it might deserve.
But the U.S. has experienced just one double-dip recession in contemporary times. And that happened in 1981 under dramatically different conditions. Then, the Federal Reserve was forced to increase interest rates sharply to rein in runaway inflation. That move, led by then-Fed Chairman Paul Volcker, is often credited with setting the country up for strong growth despite the sharp initial pain it inflicted. (Prior to that, the only other double dip took place in 1937 during the Great Depression.)
However, the Fed is in a quite different situation today, and a slowing recovery -- with soaring jobless rates and interest rates at rock-bottom levels -- now poses a potentially bigger dilemma.
Where Is America's Job-Creation Machine?
The hope thus far has been that the corporate sector -- taking advantage of growth in booming emerging markets around the world and benefiting from highly favorable policy conditions at home -- will eventually kick off a big hiring boom. But companies have been happy to pocket record profits, and they show a growing inclination to return cash to shareholders as prospects stabilize.
Of course, companies are legally obligated to focus solely on maximizing profits. They have no interest in creating jobs for jobs' sake. And some corporate bosses have attempted to capitalize on the situation by pointing to regulatory uncertainty in the hopes of seeking even more government concessions to this end.
Of course, the hiring situation could change quickly. The only thing as prevalent after a recession as talk of a double dip is the talk of a jobless recovery. And while the resumption of hiring has in fact taken longer and longer through recent economic cycles, it has eventually rebounded in the past as well.
The More Likely Scenario: Just a Slowdown
So despite all the hyperbole, investors should focus on the more mundane but likely scenario. Corporate profits are soaring for the time being but are likely to moderate as pent-up demand and a strong inventory correction lose steam. A broader economic slowdown is probably in the cards, but a second downturn is a very remote scenario.
The chances of a double-dip recession get bandied about all the time. In reality, profits have rebounded sharply to this point and are likely to merely moderate in coming quarters. Unemployment also isn't likely to see a double dip -- alas, because there has scarcely been a recovery in hiring to begin with.
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