Spreading Fear of “Double Dip” for U.S. Economy

“’Double dip’ is occurring in the U.S. economy.”

A lot of economic experts are issuing warnings against “double dip” that the U.S. economy is falling into recession, amid many bad signs of recent accounting scandals surrounding big companies, worsening company earnings and a weak dollar. Against this backdrop, stock prices are nose-diving, and the additional interest rate cut is getting highly likely. On Aug. 5, The Dow Johns Industrial Average, S&P 500 and NASDAQ dropped by more than 3 percent on the third consecutive days decline.

Ñ Loss of investor confidence = The U.S. economy registered minus growth in the second quarter and the third quarter of last year, as the Internet boom died in April, 2001. Getting over the economic damage of the September 11th terrorists’ attack, the economy started to grow. In the second quarter of 2002, however, there are ample signs that the U.S. economy is coming closer to recession again.

Many experts see that the current spiraling of the U.S. economy results from the fact that the market lost investor confidence because of big companies’ alleged accounting wrongdoing. Only few think that it is from worsening economic indices of manufacture, consumption and employment. In other words, the fall on the stock market is a main contributor to the current worsening economy.

Given that in 8 out of 12 cases in the past, nose-dive in the stock prices led to economic recession, the current steep decline on the stock market cannot be taken lightly.

“The possibility of “double dip” reaches 70 percent,” said Steven Roach, chief economist at Morgan Stanley. The pessimist for the U.S. economy also noted that as people make lesser money from their stock than before, they cut down on consumption, speeding the fall into recession.

Paul Krugman, economic professor at Princeton University said that the probability of “double dip” is higher than ever. He pointed that considering that Allen Greenspan had positive views about the U.S. economy, he must have lost much of his keen ability for economic forecast.

According to a survey of 20 big financial institutions on Wall Street conducted, Agu.4, by Reuters, the possibility of “double dip,” now, rose to 35-40%, from 20% two weeks ago.

The Financial institutions that answered the survey noted that recovering investor confidence in the market would be very important in order to stop the recession. To do so, they agreed that laws designed to prevent companies from falsifying financial documents and doing the business in an unethical way would be necessary.

Ñ Possibility of deflation = Meanwhile, some people argue that though the economy is getting worse, it is not that worse to get near “double dip.” They say the case that the U.S. is following the model of Japan, with deflation resulting from falling consumption, is too premature.

Richard Berner, an economist at Morgan Stanley predicted that the capital and labor markets of the U.S. are much more flexible than those of Japan, so the U.S. can avoid deflation with policies of lower tax and interest rates and expansionary budget policy.

Mi-Kyung Jung mickey@donga.com