Why a Double-Dip Recession Hasn't Happened

A few months ago, the outlook was gloomy. Here’s why it has brightened.


Step back to last summer for a moment. Home sales had plunged—again—after a big federal subsidy for buyers expired. Stocks were in a swoon, as investors worried that Europe's debt crisis would contaminate the world's financial system. Growth was slowing as stimulus spending from 2009 hit its peak and began to wind down. Ruinous deflation seemed possible, prompting comparisons to Japan's "lost decade." And for all the jawboning in Washington, nothing much was happening to jolt the economy.

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No wonder a double-dip seemed plausible, with some forecasters giving 50-50 odds, or more, to the likelihood of a second recession. But those concerns have slowly faded, with economists now increasingly convinced that the recovery, however weak, is here to stay. Here's why the outlook has brightened.

Nothing terrible has happened.

The financial panic of 2008 was a searing event that left investors and business leaders shaken. Now, they're primed for disaster—and more likely to overreact than to shrug off danger. The European debt crisis could still mushroom and overwhelm the resources set aside to handle it. China and other emerging markets could succumb to runaway inflation or bursting asset bubbles. The U.S. housing market, bad as it is, could sink ever further. Washington's debt load might finally come crashing down. Such fears have sent investors fleeing for safety and forced corporations to hunker down, depressing the economy more than some economists feel is warranted.

Yet none of those scary scenarios has come to pass. Not yet, anyway. The Europeans have been slow to react to the problems in Greece, Ireland, and elsewhere, yet they've shown just enough resolve to reassure the markets. China and other emerging nations are growing far faster than western economies. American consumers are managing to spend money despite the housing bust, and global investors still seem to have enough faith in America to lend to Uncle Sam at bargain rates. A crisis (or two) could still erupt, but every month without one means that Americans pay off a little more debt, companies get a little more efficient, and the recovery gathers a little more steam.

[See 4 lessons for Washington from Europe's debt crisis.]

Corporate profits have exploded. For more than a year, big companies have been performing far better than most analysts expected. In the latest quarter, according to investing firm Zacks, 359 of the firms represented in the S&P 500 reported earnings higher than expectations, with just 95 firms underperforming. A year ago, companies were turning in surprisingly good earnings because they were cutting costs much deeper than expected, while overall revenues remained flat. Now, revenue is rising as well, producing a kind of perverse boom for corporations: Despite high unemployment, profits are near record levels, far higher than most analysts ever imagined less than two years after a financial panic and brutal recession.

That's good news for anybody with an investment portfolio, since strong corporate performance has helped pushed stock prices higher, helping Americans rebuild their retirement portfolios and regain some of the wealth lost during the recession. And that has helped consumer confidence start to recover. The next obvious question: When will strong corporate performance begin to lift the overall economy and reduce joblessness? Soon, possibly. Corporations have streamlined so aggressively that they'll have little choice but to hire as demand for their stuff picks up. Plus, they've stockpiled loads of cash that can be used to finance hiring.

[See 10 companies back from the brink.]

The private sector has started to recover. The 2009 stimulus plan was obviously unpopular, but most economists agree that it boosted growth by a percentage point or more in both 2009 and 2010, and helped speed the end of the recession. The stimulus was meant to bridge the gap as private-sector demand fell during the recession, which means that private-sector activity needs to pick up again, or the end of the stimulus will leave a big hole in the economy. And just in time, the private sector is starting to show a pulse.

The private sector has added nearly 1.2 million jobs this year, with gains every month. The numbers remain too small for comfort, but the overall upward trend signals that private-sector unemployment has probably bottomed out for good. That's vital, because the private sector is the heart of the economy (except in Greece), and other big sectors are likely to shrink over the next couple of years. Government hiring in particular is likely to plateau at the federal level, and decline at the state and local level. It will take much stronger private-sector hiring to force down unemployment, but the situation is at least getting better.

[See why "recession-proof" jobs are a myth.]

Exports are strong. With little notice, U.S. exports have been rising all year, as the weak dollar and strong economies in emerging markets like China has stoked demand for stuff made in America. News about the U.S. trade balance usually focuses on all the cheap goods we buy from overseas, but we also send lots of cars, airplanes, food, farm machinery, electronic components, medical equipment and other stuff abroad. Critics scoffed earlier this year when President Obama said his goal was to double U.S. exports in five years. But so far, we're on a pace to do it. That has propped up employment in export-related industries and been an unexpected bright spot in the overall economy.

Washington has done the bare minimum. The Federal Reserve has become the nation's punching bag, yet for much of the last year it's been the only institution taking aggressive steps to shake the economy out of the doldrums. Its latest "quantitative easing" program, which started in November, may not do much to generate jobs, which is part of the purpose. But it has certainly signaled to investors that the Fed will do something—anything!—until it feels better about the economy. And by coincidence or not, a stock market that was mostly flat over the summer has surged by about 18 percent since late August, when Fed Chairman Ben Bernanke first announced the new easing program.

[See why the tax deal could be Obama's salvation.]

President Obama trumped the Fed with the nearly $900 billion tax and stimulus bill he recently negotiated with Congressional Republicans. By many estimates, that package could boost economic growth by a full percentage point over the next two years. It came at the last minute, while businesses and consumers were starting to sweat over what to do if the Bush-era tax cuts expired and their tax rates effectively went up. And it doesn't even pay lip service to worries about the national debt, since it will be financed entirely with borrowed money. But the deal could provide just enough of an economic push to make a double dip a distant worry. Now we can worry about the next set of problems.

Twitter: @rickjnewman