FRIDAY AUGUST 21, 2009

Double Dip Worries

The evidence continues to mount that the economy is modestly recovering. Yesterday, the Philadelphia Fed’s Manufacturing Index was surprisingly strong. This follows last week’s strong New York manufacturing number. Today, according to the National Association of Realtors, sales of existing homes surged 7.2%, the highest level in almost two years. With manufacturing picking up and housing no longer a drag, the economy should be able to muster positive growth in the 3rd or 4th quarter.


 

However, there are still signs of distress that lead some to question the possibility of the dreaded “double dip,” the recession-modest recovery-new recession scenario. A weak employment environment and weak consumer balance sheets have economists concerned that the consumer will remained sidelined for the foreseeable future. Also, sooner or later, the massive monetary and fiscal stimulus will run its course and will need to be weaned out of the market. Will car sales remain strong now that the “Cash for Clunkers” is set to end on Monday? Can the economy still grow with out government stimulus?

 

It is a good question. However, a look at the history of recessions over the last one hundred years shows that double dips are very rare. Once the economy begins to recover, it tends to gain momentum and continue to grow. That momentum tends to continue until the Federal Reserve takes the punch bowl away, that is, begins to raise interest rates. I strongly doubt that the Fed will raise rates anytime soon. They have other programs, such as the Treasury bond purchase program and TALF, that they will remove first before the Fed focuses on interest rates.  So, can we have a double dip? Sure. Is it highly probable? Not really.

POSTED AT 1899-12-30 10:50:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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The opinions expressed here do not represent the views of Alliance Financial Corporation and Alliance Bank, N.A. This communication is not an offer or solicitation for the purchase or sale of any security, is for general informational purposes only and does not provide personalized investment advice. When making personal investment decisions you should consult your investment adviser or rely on your own research. Copyright 2008.