Business Insider

Peter Crabb: Behind gloomy economic news are signs we'll avoid a double dip

This summer there have been calls for a double-dip. But not at the ice cream shop.

The so called “double dip” is a time of back-to-back recessions. Two recessions in close proximity are rare events. The recession of 1981 followed just shortly after a downturn in the summer of 1980. That is our only such experience.

Many are saying the double dip is back with this week’s announcement that U.S. economic growth was lower in the second quarter than first estimated. But the market says maybe not.

Stock prices were down all week but rebounded strongly on Friday even though economic growth data was revised downward. The U.S. Commerce Department reported that the economy grew at a 1.6 percent rate in the three-month period ending June 30. The previous estimate for this period was 2.4 percent growth.

The downward revision brings more forecasts of a double-dip recession. The argument is that economic growth is faltering because policymakers have not done enough to help households.

Yale University economist Robert Shiller told The Wall Street Journal last week that a second period of declining gross domestic “may be imminent.” Shiller argues that a continuing weak housing market and high unemployment rate will hold back consumer spending and therefore economic growth.

Shiller and others may be missing what stock investors see: Consumers are spending again. The overall GDP number was revised lower, but the biggest component, consumer spending, was revised upward.

Gross Domestic Product is measured from spending in four main categories – personal consumption spending, gross private domestic investment, net exports of goods and services, and government expenditures. In the U.S., personal consumption expenditures account for more than 70 percent of overall GDP.

According to the Commerce Department’s Bureau of Economic Analysis, the revision in the overall GDP growth from 2.4 to 1.6 occurred because imports were revised upward and exports revised down. That is, net exports of goods and services were more negative.

This isn’t necessarily a bad thing. When we are willing to buy, we always buy more from other countries. The outlook for consumer spending may be looking up.

Another revision to the second-quarter estimate is also positive for the near-term outlook. The amount of what corporations bought for their inventory was lowered. This can lead to more business investment.

When companies have a better control on inventories, they free up cash for investment. Idaho businesses are following the national trend and keeping less on the shelves.

Sandpoint-based women’s retailer Coldwater Creek surprised the market last week by announcing a profitable quarter. The company president said profits were better this past quarter because the company was controlling inventory levels.

The national trend in investment is positive. The second component of GDP, gross private domestic investment, rose strongly in the first half of 2010. Specifically, nonresidential investment, what businesses spend money on when they expect better sales in the future, rose in each of the past two quarters after having declined for seven quarters straight. Investment in equipment and software rose during the first half of the year at more than 20 percent.

News of downward revisions may be dismal, but the short-term trends are positive. A double-dip recession is not on the menu.

Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.