“We’re getting mixed signals, and the economy could truly go either way,” says Nash, vice president of corporate and strategic alliances and Northwood’s David E. Fry Endowed Chair in Free Market Economics.
“The evidence of a double-dip recession is getting stronger and stronger, particularly in the real estate market. There are disturbing signs out there,” he reports. Assisted by senior economics major Adam Matzke, Nash recently addressed a series of questions we posed about the issue and its impact on the automotive industry.
Q: How exactly is a double dip recession defined, as opposed to a deepening of the existing recession or even a depression?
A: A recession is generally defined as two consecutive quarters of negative Gross Domestic Product (GDP). A depression is a prolonged recession with unemployment at the double digit level. Recall that unemployment during the Great Depression of the 1930s actually peaked at 25 percent. Generally speaking, a double dip recession is a recession followed by a short period of economic growth and then another recession. The technical definition of a double dip recession specifies that a short period of economic growth is signified by two quarters of positive growth of GDP, although economists argue over this exact definition.
Economists point out that a double dip recession resembles the letter “W.” Double dip recessions are damaging to the morale of an economy, as evidenced by a lack of substantial recovery and a failure to return to long run economic confidence. Double dip recessions are also known to be quite rare. In fact, the most recent double dip recession in the United States probably occurred from 1980-82. Over this 36-month period, the economy was in recession for 24 of those months. The first recession was short and mild and lasted from January through June 1980. We then experienced moderate economic growth until July 1981, when the economy fell back into a rather severe recession that lasted until the end of 1982.
Because the U.S. economy has been in an erratic and slow recovery since early 2009, a return to a recession would more correctly be referred to as “back-to-back recessions” rather than a double dip recession.
Q: How do you rate the chances the U.S. is about to experience a double dip recession?
A: The chances of the United States movinog into a second recession are very real, but not ordained. Home mortgage rates, real estate prices and sales are currently in a double dip recession. The reported 1.9 percent U.S. GDP growth in the first quarter of 2011 is actually only .7 percent, as two-thirds of said growth is currently being held in inventory that has not been sold. Therefore, adjusted growth for the first quarter of 2011, discounting for inventory, is a meager .25 percent. While second and third quarter 2011 GDP remains below 2 percent.
This is dangerously close to no growth, or even negative economic growth, and could be signaling a real slow down in the economy over the next couple of quarters, especially compared to the 3.1 percent growth in GDP for the fourth of quarter of 2010. September and October economic data is mixed at best and gives us cause to be concerned regarding economic growth throughout the rest of the year.
Further reasons for pessimism are the uncertainty over the European debt crisis, the more than $14.8 trillion U.S. national debt, the possibility of increases in U.S. personal and corporate tax rates and concern over regulations and the implementation of health care reform. Reasons for optimism include increases in U.S. efficiency and productivity over the last two years, generally strong corporate balance sheets, as well as pent-up consumer demand and high saving rates.
Q: What are your ideas for preventing it?
A: The United States must get its fiscal house in order if we are to prevent a second recession or worse. The U.S. national debt is closing in on 100 percent of GDP, and this trend must be stopped and reversed.
Members of Congress must have the courage to cut government spending and not attempt a quick fix by increasing taxes. A tax increase, in our opinion, will only slow or break the back of an already tenuous U.S. economy. It is time that members of Congress make the same types of spending cuts and difficult decisions with the federal budget that households and businesses have been making over the last three years. Restructuring government and making it more efficient is the answer, not the encouragement of more of the same.
The United States has the second highest corporate income tax rate in the industrialized world at 39.27 percent. Increasing the tax on businesses is not the answer. It should also be noted that the top 1 percent of personal income earners pay more than 40 percent of personal income taxes in the United States, while the bottom 50 percent pay less than 3 percent of the personal income tax.
Furthermore, we believe that cutting the corporate and personal tax rates in the United States would spur economic growth and increase tax revenue to the federal government. One needs only to study President Kennedy’s tax cuts of the 1960s and President Reagan’s tax cuts of the 1980s to see that this is true. Budget deficits increased under President Reagan not because tax cuts failed to produce increased revenue to the federal government, but rather because the increased revenue that resulted from tax cuts was outpaced by a greater growth in government spending over said period.
We also would suggest that the government cap federal taxes at 25 percent for both personal and corporate levels; eliminate the capital gains tax; and introduce a federal balanced budget amendment. This would be similar to what 49 out of 50 states have incorporated into their budgets today. We believe this would introduce immediate incentives and confidence to the economy.
Q: Should a double dip recession take place, what would be its impact on the auto industry in general and specifically the aftermarket?
A: A second recession would be very difficult for the U.S. automobile industry in general. It would result in the loss of confidence and a reversal of the economic progress that has been made over the last two years. It would certainly result in mass layoffs, additional plant closings and the discontinuing of the upward trajectory that we are seeing in quality, innovation and new product design from the U.S. new vehicle side of auto industry.
It is highly unlikely that Chrysler would be able to survive a second economic downturn so soon into its emergence from bankruptcy. The automotive aftermarket would fare far better as it tends to run counter to the general business cycle and has performed admirably over the last two years.
Q: Since people tend to hold on to their vehicles longer when hard times hit, might the aftermarket glean benefits?
The U.S. automotive aftermarket is one of the most robust and resilient parts of the U.S. economy…period. It tends to fair well during economic expansions and bucks the downward trend to perform very effectively during the downturn in the business cycle.
With the average age of an automobile being roughly 11 years and more than 250 million vehicles on the road, the U.S. automotive aftermarket will perform much better than the economy as a whole if in fact the economy enters a second recession. It is important to note that while we believe the automotive aftermarket will do better than the automobile industry or the U.S. economy in general if a recession takes place, a downturn for the automotive aftermarket is not a substitute for strong and robust economic growth for the U.S. economy in general.
We are not yet ready to formally call a “Double-Dip” or a “Back to Back” recession as the data is mixed and businesses are uncertain and guarded. However, if we do not address the above noted issues, America will continue a slow, gradual slide toward economic mediocrity and, over time, lose its position as the most revered economy in the world.
