Though the recessions of early 1970s and 1980s have witnessed multiple dips due to weak economic fundamentals, the present recession is destined to avoid it. Though business confidence is yet to accrue, the buoyant household sector seems to drive the recovery.
The current accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, should be sufficient to foster an improving business climate over time
It is well-known that the capitalist system is prone to business cycles. However, the present one has been unlike all before. According to the NBER the US economy entered into a recession from March 2001. The economic indicators such as unemployment rate, manufacturing, consumer spending and GDPall proved the same. Then came the September 11 attacks. After the sudden jolt, there was a boost in GDP growth, much of which is attributed to the brisk spending of the government on defense security and recovery efforts. The Fed, however, reduced interest rates indiscriminately. This fueled a refinancing boom due to ultra-low mortgage rates and made possible zero-interest automobile financing. Hence, the US economy witnessed mild signs of recovery in the second quarter of 2002. As the economy was reviving with early signs of recovery, inventories again started building up to avoid lost sales. However, investor psychology remained to be gloomy. How can a recovery take place unless all the sectors (at least most) of the economy do not respond together? As Alan Greenspan puts it in a recent testimony, "After all, the purpose of a prompter response by businesses: To prevent severe imbalances from developing at their firms, which in the aggregate can turn into deep contractions if unchecked."
Generally double-dips or even triple dips happen when one or more sectors fail to keep pace with the rebuilding of inventory stock after a recession. History has been witnessing this phenomenon since longthe nearest examples are the recessions of 1972-74 and 1981-82. The causes of multiple dips in the previous recessions were jobless claims and weak economic fundamentals. However, the present one, unlike the previous ones, suffers from weak investor confidence rather than economic fundamentals. |
