Double dip recession: What are the odds?

Annalyn Censky, staff reporter, On Wednesday June 9, 2010, 8:35 am EDT

Europe's debt crisis. Companies still not hiring. The Gulf oil spill. These are uncertain times to say the least. But while you might think economists would be running for the hills and looking ahead to a so-called "double dip recession," that's not necessarily the case.

In fact, some economists think a double dip is even less likely than it was earlier this year.

David Wyss, chief economist with Standard & Poor's, said that even though he thinks slower U.S. growth is practically a sure thing, the odds of a double-dip actually have shrunk to 20%, from 25% earlier this year.

Same goes for Derek Hoffman, founder and editor of The Wall Street Cheat Sheet, who also puts the odds of a double dip at 20%, when just a few months earlier he saw them at 50-50.

The term "double dip" refers to a recession followed by a short-lived recovery that then slides back into a second recession. It can be measured by fluctuations in gross domestic product, or GDP -- one of the broadest measures of economic activity.

Hoffman said he changed his mind about a potential double dip after major U.S. companies reported solid profit growth in the first quarter of 2010 and European leaders approved a $1 trillion bailout package to deal with the region's debt crisis.

Granted, the picture isn't all rosy. Unemployment is still high at 9.7%. But Wyss points out that consumers are spending again. Plus, the average person on main street doesn't seem as worried about getting laid off as they were a year ago, he said.

Wyss's comments echo those of Federal Reserve chairman Ben Bernanke, who on Monday told reporters that he expects a continued economic recovery, in part because of revived consumer spending. Bernanke also said the recovery would be slow -- it "won't feel terrific," he said.

Bernanke dodged a question about whether he fears a double-dip recession, saying "nobody knows with any certainty."

To be sure, any chance of a double dip is nothing to shrug off.

Mark Vitner, a senior economist at Wells Fargo Securities, likes to call himself an optimist, but said he can't deny that when he talks to clients, he's blunt about the risk of a double dip. He calculates the chances of one happening at about 30%, whereas a few months ago, he would have said it was as low as 15%.

"We experienced the worst crisis in a generation and now there are major problems in Europe and with the oil spill. How optimistic can you expect an optimist to be?" he said.

The winding down of government stimulus programs and inventory rebuilding, which together accounted for much of the recovery, are the major factors behind a slowdown, Vitner said.

Add in geopolitical unrest and volatile global markets, and businesses, consumers and lawmakers alike will be more hesitant to make investments that could support economic growth.

"One of the things to remember is conditions do not have to be perfect for the economy to grow," Vitner said. "But there's a limit to how much bad news this economy can take."

In the case of the Great Recession, the U.S. economy shrunk by 6.3%, the sharpest decline in 26 years. A year later, that negative number turned positive: GDP in the fourth quarter of 2009 showed 5.6% growth -- the best in 6 years.

For a double dip to technically occur, GDP would have to once again turn negative.

Overall, economists are predicting that the U.S. recovery will slow to around 3% growth this year. Nevertheless, growth is growth.

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