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News --- THE OUTLOOK: What It Would Take to Do a Double Dip By Justin Lahart 703 words 13 June 2011 The Wall Street Journal J The Wall Street Journal - Print and Online CTGWSJ A2 English (Copyright (c) 2011, Dow Jones & Company, Inc.) Corrections & Amplifications The Federal Reserve is allowing its $600 billion bond-buying program to expire this month. The Outlook column on Monday incorrectly said it was a $600 million program. (WSJ June 14, 2011) (END) For those fretting that a string of disappointing U.S. economic data presage a double dip in the recession, there is good news and bad news. The good news: It would probably take a significant shock to knock the economy off course, even in its weakened state. The bad news: In the current environment there are plenty of potential shocks to worry about. History doesn't offer much consolation. In the summer of 1981, the U.S. economy entered the second, harrowing chapter of a double-dip recession. Now, almost exactly 30 years later, the economy has slowed markedly, raising the risk of a repeat performance. Most economists reckon the economy will right itself. The recent rough patch is probably temporary, they say, due largely to three factors: First, supply-chain disruptions caused by the earthquake and tsunami in Japan; second, severe weather and flooding in the Southeast and Midwest; and third, high gasoline prices that in recent weeks have begun to ease. And history also says that even when the economy is weak, as it now appears to be, it will continue to grow unless something big comes along to upset it, according to Stanford University's Bob Hall, chairman of the National Bureau of Economic Research committee of academic economists that dates the beginning and end of U.S. recessions. According to the panel, the latest recession ran from December 2007 to June 2009. "The shocks that have pushed us into recession have not been that small," Mr. Hall says. "It takes a significant adverse impulse, I think." A severe shock triggered the second downturn in 1981. After inflation quickly took hold again following the brief 1980 recession, the Federal Reserve pushed short-term interest rates above 20%, slamming the brakes on the economy. Millions lost their jobs in what was, up until then, the worst downturn since the 1930s. Today, even with recent increases in food and energy costs, inflation is only a fraction of what it was in the early 1980s, and the Fed appears committed to keeping low interest rates in place. And while the Fed is allowing its $600 million bond-buying program to expire this month -- rather than extending it, as some economists would like -- this is unlikely to knock the economy off kilter. But the wrangling over the budget in Washington could stifle the economy just as a Fed rate increase would, says Bank of AmericaMerrill Lynch economist Ethan Harris. On the one hand, he worries that if the congressional standoff over raising the debt ceiling persists, it could push Moody's and Standard & Poor's to cut their rating on U.S. sovereign debt. That could roil credit markets, stanching businesses' access to capital. On the other hand, Mr. Harris worries that in their zeal to tame the budget, members of Congress might make deep cuts to the budget at a time when the economy is too weak to handle them. Page 1 of 2 2011 Factiva, Inc. All rights reserved.

"We need to get past this budget debate," Mr. Harris says. "It's very debilitating for the economy. Then there's oil. The price of crude has eased recently, but with the situation in Northern Africa and the Middle East unsettled, a fresh spike higher in crude prices can't be ruled out. With household balance sheets still badly damaged by the housing bust, consumers have far less wiggle room than usual to handle high energy prices, says Harvard University economist Ken Rogoff. "They can't just take it out of savings." Mr. Rogoff is among those economists who deem a double-dip recession unlikely. But his research also shows that following financial crises, economies tend to grow only fitfully. Viewed in that context, the rough patch that the economy has lately hit shouldn't be a surprise, nor should it be a surprise if there are more of them. License this article from Dow Jones Reprint Service Document J000000020110613e76d0002j

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