A new report contains some very good news for investors: Double-dip recessions are very rare.
That means that a drop back into recessionary conditions looks less and less likely even as unemployment creeps higher and has crossed the 10% threshold for the first time in a quarter century.
After reviewing U.S. economic history all the way back to the 1850s, Deutsche Bank AG (NYSE: DB) economists found that double-dip recessions are exceedingly rare: There have only been three episodes in which the economy has fallen back into recession within a year of a previous recession ending. And that��s out of 33 recessions that have taken place since 1854.
Indeed, when these double-dip downturns do occur, they happen under circumstances quite different from today's situation.
Two of the three double-dips happened in the years prior to World War II �C in 1913, and again in 1920. The more relevant example was the double-dip recession of the early 1980s, which was driven by the fight against double-digit inflation rates.
U.S. President Jimmy Carter imposed credit controls in March 1980, which resulted in a sharp but short-lived recession before the economy expanded again for 12 months. Then U.S. Federal Reserve Chairman Paul A. Volker hiked short-term interest rates to 20% in the summer of 1981, as he pushed the economy back into recession but dealt a death blow to inflation.
With deflation just as likely as inflation at the moment, a repeat of the 1980s just isn't in the cards, as the Fed is set to keep rates at very low levels until the end of 2010.
Tom McClellan of the McClellan Market Report has some more potentially good news. As you can see in the chart above, the level of employment tends to follow stocks on a 12-month lag. It's not a perfect match: The red numbers show the actual lags of important turning points over the last forty ! years. B ut the correlation is strong enough to provide one more piece of evidence that the "turn" in employment is perhaps four months or so in the future.
That means that a drop back into recessionary conditions looks less and less likely even as unemployment creeps higher and has crossed the 10% threshold for the first time in a quarter century.
After reviewing U.S. economic history all the way back to the 1850s, Deutsche Bank AG (NYSE: DB) economists found that double-dip recessions are exceedingly rare: There have only been three episodes in which the economy has fallen back into recession within a year of a previous recession ending. And that��s out of 33 recessions that have taken place since 1854.
Indeed, when these double-dip downturns do occur, they happen under circumstances quite different from today's situation.
Two of the three double-dips happened in the years prior to World War II �C in 1913, and again in 1920. The more relevant example was the double-dip recession of the early 1980s, which was driven by the fight against double-digit inflation rates.
U.S. President Jimmy Carter imposed credit controls in March 1980, which resulted in a sharp but short-lived recession before the economy expanded again for 12 months. Then U.S. Federal Reserve Chairman Paul A. Volker hiked short-term interest rates to 20% in the summer of 1981, as he pushed the economy back into recession but dealt a death blow to inflation.
With deflation just as likely as inflation at the moment, a repeat of the 1980s just isn't in the cards, as the Fed is set to keep rates at very low levels until the end of 2010.
Tom McClellan of the McClellan Market Report has some more potentially good news. As you can see in the chart above, the level of employment tends to follow stocks on a 12-month lag. It's not a perfect match: The red numbers show the actual lags of important turning points over the last forty ! years. B ut the correlation is strong enough to provide one more piece of evidence that the "turn" in employment is perhaps four months or so in the future.
So while the public will continue to be preoccupied by a still rising unemployment rate and political chatter over the perceived failure of the Obama administration's stimulus package – the market will continue to anticipate the improvement just over the horizon.
One final note: The economists at ISI Group note that outside of the United States, employment already started to grow in 11 economies. These include Japan, Canada, Singapore, Brazil, Russia, Sweden, and Taiwan. Stocks have sniffed out the fact that a global employment turn is already happening. The U.S. economy just isn't fully participating yet, but it will.
One final note: The economists at ISI Group note that outside of the United States, employment already started to grow in 11 economies. These include Japan, Canada, Singapore, Brazil, Russia, Sweden, and Taiwan. Stocks have sniffed out the fact that a global employment turn is already happening. The U.S. economy just isn't fully participating yet, but it will.
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