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America’s Coming Double Dip

Soaring financial markets are blithely indifferent to lingering vulnerabilities in the US economy. But the impact of consumers' fear of COVID-19 on pandemic-sensitive services are unlikely to subside, undermining the case for the uninterrupted recovery that investors seem to expect.

NEW HAVEN – The double dip is not a dance. It is the time-honored tendency of the US economy to relapse into recession after a temporary recovery. Over the years, it has happened far more often than not. Notwithstanding frothy financial markets, which currently are discounting the nirvana of an uninterrupted V-shaped recovery, there is a compelling case for another double dip in the aftermath of America’s devastating COVID-19 shock.

The daunting history of the US business cycle warns against complacency. Double dips – defined simply as a decline in quarterly real GDP following a temporary rebound – have occurred in eight of the 11 recessions since the end of World War II. The only exceptions were the recessions of 1953-54, the brief contraction of 1980, and the mild downturn of 1990-91. All the others contained double dips, and two featured triple dips – two false starts followed by relapses.

The double-dip does not, of course, come out of thin air. It reflects the combination of lingering vulnerability in the underlying economy and aftershocks from the initial recessionary blow. As a general rule, the more severe the downturn, the greater the damage, the longer the healing, and the higher the likelihood of a double dip. That was the case in the sharp recessions of 1957-58, 1973-75, and 1981-82, as well as in the major contraction that accompanied the 2008-09 global financial crisis.

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