Is the Economy Headed for a Double Dip Recession?


There has been a lot of speculation that the economy could be headed for a double-dip recession. Thursday's 1,000 point fall didn't help. However, Friday's encouraging unemployment numbers in the U.S. seem to put a damper in that thinking -- at least for now.

"We were expecting a pullback the past four weeks," says Susan Fulton, co-founder and principal of FBB Capital Partners in Bethesda, MD. Fulton says the market was a little overbought and blames the recent weakness partly on "sell in May and go away," but mostly on the fact the "European Union is showing fundamental cracks in its foundation."

As stock markets are forward looking, the worry was that the stock market's fall could signal a double dip recession. There are definitely similarities between now and the early signals of the recent recession. Much before the financial system imploded and the recession was in full bloom, economists, analysts and even politicians warned about the inherent risks in the financial system stemming from subprime mortgages, the products that sold them, and the exposure of the financial system to both.

Flaws in European Union

Similarly, Fulton says people have been warning about the risks in the Greek situation. For a while now, it wasn't clear whether the Germans would be willing to tighten their belts for a country that didn't show fiscal responsibility itself. And, of course, there is the risk of the debt woes spreading quite aggressively into Spain, Italy, Portugal and to a certain extent Ireland, possibly taking the whole European Union down. With such high debt borrowing costs, it's not a far-fetched scenarios.

Then there is the lack of proper regulatory bodies and rules. In the financial meltdown, such deficiencies were blamed for not being able to stop financial institutions from spiraling the U.S. and the globe into an economic recession.

Similarly, there are fundamental flaws in the European Union. "The EU doesn't have a central governing body that will force action by member states," says Fulton, and Greece and other states didn't play by the rules (such as only having a certain amount of debt).

And, of course, there is the unknown. When the financial crisis began to unfold, no one knew the extent of the exposure and the risk. Needless to say it caught people, financial institutions and governments by surprise as the depth of the recession even reminded many of the great depression.

Similarly, we currently don't know how the unfolding Greek/European situation will affect consumers, companies and nations. And like Lehman in September 2008 has exposed the system's flaws and risks, and to an extent was the catalyst to the market plunge, Greece has exposed the weakness in Europe and has been the catalyst to the recent market declines. And while Germany and Italy have already approved aid to Greece, some still fear it would have to default.

A Global Economic Recession?

Either way, some economists fear this could throw the whole of Europe back into recession. And if Europe is in recession, could this trigger another global economic recession as banks reel from sovereign debt defaults?

Are we entering a double dip then? It's possible, says Fulton, adding that not much has been fixed in the U.S. either. The situation with Goldman Sachs has "exposed the underbelly of our financial system." Since "Goldman Friday," markets haven't been able to recover.

But Fulton remains optimistic. While she predicts the euro will go very low, that Europe will have a hard time getting out of this situation, and that the markets are going to be very fragile until September, she also says that "nationally, we are seeing indication of a turnaround." In fact, she believes that companies with strong cash flows and that trade on U.S. exchanges have potential for upside. "Long-term we're bullish on America," she says.