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Is US Economy Heading for a ‘Double Dip’?

3 December 2009 - Markets - Editor

With the majority of economic analysts in agreement that the US economy is moving out of the recession and is in a recovery phase, many are still dubious, biding their time to see if the recovery will be sustained, or go into decline again in what is being termed as a 'double dip'. The view that the US economy is in recovery is being based primarily on the 3.5 percent growth experienced in the third quarter, but the surge of optimism has not touched everyone, and some economists are calling for authorities to be prepared with economic stimulus plans to be put into action early next year, particularly with the aim of creating jobs in a struggling labor market where the ranks of the unemployed keep growing.

A report released this week by payroll processor ADP revealed that businesses with less than 50 employees cut 68,000 workers in the month of November showing that small businesses are battling. In October the total job loss figures were 190,000 causing unemployment to hit a 26-year high of 10.2 percent. With consumer dollars being a driving force behind the health of the economy, accounting for up to 70 percent of the nation’s economic activity, clearly jobs are needed to put consumers in the position to spend again. Retail sales have shown a slight improvement of late, however the National Retail Federation has noted its expectation that sales during the festive shopping season will be down by at lease one percent as compared to last year, making it almost impossible to break out of the current cycle where consumers buy less, therefore retailers buy less, therefore manufacturers manufacturer less, therefore jobs are lost - and so it continues.

Another 'double dip' concern being cited is the volatility of oil prices. Although economists agree that it is unlikely that the 2008 prices exceeding $145 a barrel are likely to be repeated anytime soon, oil prices have been rising again with expectations that an increase in demand could push the price above $100 in 2010. The spin-off of high oil prices are likely to be much the same as before, with consumers having to allocate more of the household budget to fuel costs, causing retailers and other suppliers to lose out on consumer dollars, resulting in cut-backs in investments and workforce.

As one of the leading factors behind the recession, the US housing market remains fragile. Although there has been an improvement in sales in recent months, this is likely due to factors such as lower mortgage rates and the federal tax credit for buyers, both of which are tenuous and unreliable. Additionally, an inventory of foreclosed homes have still to be processed before hitting the market, and fears are that when they do it will put downward pressure on prices, a situation that may be welcomed by those who argue that housing prices are still too high in relation to income. Stock market investing certainly has its ups and downs, and the multifaceted aspects of economic recovery will no doubt be carefully monitored in the months to come.

 


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