A double-dip or W-shaped recession occurs when the economy emerges from a recession, has a period of growth, but then falls back into recession, well short of a full economic recovery. This prospect raises policy questions about the current level of economic stimulus and whether added stimulus may be needed. During 2009 and 2010, growth had been largely sustained by transitory factors, such as fiscal stimulus and the rebuilding of inventories by business. In the first quarter of 2012 growth slowed again, falling to a 1.9% annual pace. This report discusses factors suggesting an increased risk of double-dip recession. It also discusses other factors that suggest economic recovery will continue. Also examined is the role of deleveraging by households and businesses in the aftermath of the recent financial crisis in shaping the likely pace of economic recovery. The report concludes with a look at current economic projections. Factors That Suggest Increased Risk of Double-Dip Recession

A double-dip recession in the United States is likely to be the consequence of a substantial negative economic shock to an already weak economy. The unemployment rate, which had peaked at 10.1% in October of 2009, had fallen to 8.1% in April 2012, but increased to 8.2% in May 2012. Historical Experiences with Double–Dip Recession

Double-dip recessions are rare. There are only two modern examples of a double-dip recession for the United States: the recession of 1937-1938 and the recession of 1981-1982. They both have the common attribute of resulting from a change in economic policy. However, in the first case, recession was an unintended consequence of the policy change; in the second case, recession was an intended consequence of the policy change. Historically, there has been what is termed a "snap back" relationship between the severity of the recession and the strength of the subsequent recovery. In other words, a sharp contraction is followed by a robust recovery tracing out a V-shaped pattern of growth. The contraction was sharp, but recovery has been slow and uneven. In the recovery's first year, real GDP growth averaged 3.3%, slow in comparison to other post-war recoveries, but fast enough to slowly reduce the unemployment rate. In the recovery's second year, growth decelerated to a much slower 1.6% average rate, a pace too slow to prevent the unemployment rate from rising. The Impact of a Financial Crisis on the Pace of the Subsequent Recovery

Unlike earlier post-war recessions, the recent recession occurred with a financial crisis. Carmen Reinhart and Kenneth Rogoff say in a recent book that a slow protracted recovery with sustained unemployment is the norm in the aftermath of a deep financial crisis. The Drag of Deleveraging on U.S. Economic Growth

The prelude to the economic crisis in the United States was characterized by excessive leverage (the use of debt to support spending) in households and financial institutions, generating an asset bubble that eventually collapsed and left balance sheets severely damaged. The aftermath is likely to be a period of resetting asset values, deleveraging, and repairing balance sheets. This correction results in higher saving, weakened domestic demand, a slower than normal recovery, and persistent high unemployment, but not necessarily in a double-dip recession. Economic Projections

Given the large deterioration of the balance sheets of households and businesses, the possible reduction of the U.S. economy's level of potential output, and the weakened state of the global economy in the aftermath of the recent financial crisis, projections of the U.S. economy's near-term path carry a high degree of uncertainty.
Concerns have been expressed that growth in the United States may falter to the point where the U.S. economy again experiences recession. A double-dip or W-shaped recession occurs when the economy emerges from a recession, has a short period of growth, but then, still well short of a full recovery, falls back into recession. This prospect raises policy questions about the current level of economic stimulus and whether added stimulus may be needed. The pace of the recovery has been relatively slow and growth has recently decelerated. For the first year of the recovery, real GDP grew at an average rate of 3.3%, slow by the standard of earlier post-war recoveries, but fast enough to stop the rise of the unemployment rate at 10.1% in October 2010 and to cause it to fall to 9.5% by mid-2010. In the recovery's second year, the rate of GDP growth slowed to an average rate of 1.6%, and the unemployment rate was only slightly lower at 9.1% by mid-2011. Growth remained weak during the recovery's third year, advancing at an annual rate of 1.9%, and the unemployment rate had only improved to 8.2% by May 2012. Other indicators, such as weak consumer spending, falling house prices, reduced flows of credit, the prospect of fading fiscal stimulus, and the premature return of recession in the euro area are also worrisome.
Double-dip recessions are rare. There are only two modern examples of a double-dip recession for the United States: the recession of 1937-1938 and the recession of 1981-1982. They both had the common attribute of resulting from a change in economic policy. In the first case, recession was an unintended consequence of the policy change; in the second case, recession was an intended consequence. Historically, there has been what is termed a "snap back" relationship between the severity of the recession and the strength of the subsequent recovery. In other words, a sharp contraction followed by a robust recovery traces out a V-shaped pattern of growth. However, unlike earlier post-war recessions, the recent recession occurred with a financial crisis. Research suggests that a slow recovery with sustained high unemployment is the norm in the aftermath of a deep financial crisis.
The prelude to the economic crisis in the United States was characterized by excessive leverage (the use of debt to support spending) in households and financial institutions, generating an asset price bubble that eventually collapsed and left balance sheets severely damaged. The aftermath is likely to be a period of resetting asset values, deleveraging, and repairing balance sheets. This correction results in higher saving, weakened domestic demand, a slower than normal recovery, and persistent high unemployment, but not necessarily a double-dip recession.
Slower growth in the first half of 2011 was, in part, attributable to temporary factors, such as supply chain disruptions caused by the earthquake in Japan, recent floods and tornadoes in the South and Midwest, and the spike in many commodity prices, particularly oil. Nevertheless, recent economic indicators suggest that the recovery's underlying momentum has also weakened. While not leading to projections of a double-dip recession, this weakening has prompted many economic forecasters to substantially reduce their near-term growth projections from those made in 2011.
This report discusses factors suggesting an increased risk of a double-dip recession. It also discusses other factors that suggest economic recovery will continue. It presents the U.S. historical experience with double-dip recessions. It examines the role of deleveraging by households and businesses in the aftermath of the recent financial crisis in shaping the likely pace of economic recovery. The report concludes with a look at current economic projections.