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Next Stop: Double-Dip Recession?

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Not all that long ago, the phrase "double-dip" meant a delicious, icy dessert. But alas, all too often today that same phrase is followed by the ugly word "recession."

Though the National Bureau of Economic Research -- the folks that call the official beginning and end of economic cycles -- has yet to declare the recession ended, the U.S. economy has definitely shifted trajectory since its 2007-to-2009 plunge. Even if we set economic indicators aside, the stock market has definitely registered its vote in favor of a recovering economy.

But like Die Hard's John McClane, the global economy just can't seem to avoid trouble. And nasty trouble at that. As a result, many market-watchers continue to see the potential for the U.S. to slip back into recession in the coming quarters.

Yeah, right on!
Plenty of data points paint a none-too-flattering picture of the tenacity of the economic recovery. Front and center on everyone's mind right now is the unfolding situation in Europe.

Greece has been grabbing all of the attention when it comes to profligate EU countries weighed down by enormous debt loads, but all of the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) have the potential to cause problems for the eurozone. As the EU is a major U.S. trading partner, austerity-induced economic slowdowns in those countries would impact the U.S. Likewise, declines in the value of the euro make U.S. goods less price competitive not only in Europe, but around the world.

Of course, we don't have to rely on Europe for economic difficulties; we have plenty of homegrown troubles. Big banks like Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) appear to be moving in the right direction, but they're also still being fed ridiculously cheap capital thanks to the rock-bottom federal funds interest rate. It also seems questionable at best whether the U.S. housing market is really on the mend. Indicators have shown movement in the right direction, but the market has also been significantly goosed by handouts from Uncle Sam.

And while it may not be useful to try and compare the U.S. economy to that of Greece, it's tough to ignore the fact that the cancer in that country's economy -- a hefty debt load and big budget deficits -- can also be found right here in the U.S. of A.

Heck, even some good news may not be what it seems. Last Friday, retail sales growth of 0.4% should have been good news. However, as my fellow Fool Seth Jayson pointed out on the Motley Fool Money radio show, much of the gains came from spending on home and garden items from places like Home Depot (NYSE: HD  ) and Lowe’s (NYSE: LOW  ) . Seth's view is that those gains are a reflection of the funny money that the government was pumping into the housing market, not a broader pickup in retail spending.

The only thing we have to fear ...
Interestingly, Yale economist and financial-bubble watcher Robert Shiller penned an op-ed in The New York Times earlier this week suggesting that the thing we should fear most when it comes to a double-dip recession is ... fear of a double-dip recession.

To be sure, many economic indicators do appear to be moving in the right direction. Manufacturing has been making major gains, public company earnings have been trouncing expectations, and even the housing market has been surprising people to the upside. But in the end, confidence and sentiment still hold the keys to the kingdom when it comes to crucial economic drivers like lending, spending, and hiring.

And as Shiller pointed out, there has been an assault on sentiment in the U.S. lately. Take the May 6 "flash crash" for instance. With a stalwart like Procter & Gamble (NYSE: PG  ) falling as much as 36% and Accenture (NYSE: ACN  ) ludicrously trading down to $0.01, it's pretty obvious that what happened was a market malfunction. But that doesn't seem to matter. The event has gotten into the heads of investors and has many folks starting to talk about a potential repeat of the 1987 crash.

Though the situation in Europe definitely poses a tangible economic threat to the U.S., Shiller suggests that the images of people rioting in Athens may have an even larger psychological impact. And from there we could add in any number of events tangentially related to the economy, but potentially psychologically troublesome: the oil leak in the Gulf of Mexico, the unrest in Thailand, or the government investigations of Goldman Sachs (NYSE: GS  ) and other financial giants.

How likely?
Shiller was quick to point out that a double-dip recession still seems unlikely, noting that "when inflation-adjusted G.D.P. has come out of a decline and posted three or four quarters of gains, it has never immediately begun to fall again -- at least not since quarterly numbers began to be issued in 1947."

But a lot rides on which definition of a double-dip recession you subscribe to. For Shiller, it's any time the economy goes back into recession before employment has returned to a normal level after the previous recession, which is exactly what happened in the recessions of 1929-1933 and 1937-1938. Under that definition, it can be years between recessions and still be considered a double dip.

Whether we're in for that this time around will depend a lot on whether we can shake that creeping sense that something is about to go very wrong.

Take our poll then please scroll down to the comments section to talk more about your choice.

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Accenture, The Home Depot, and Lowe's Companies are Motley Fool Inside Value picks. Procter & Gamble is a Motley Fool Income Investor selection. The Fool owns shares of Procter & Gamble. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool’s disclosure policy assures you no Wookiees were harmed in the making of this article. Well, just one, but that was his own fault for doing a John McClane impression without proper safety equipment.

Read/Post Comments (13) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 19, 2010, at 6:14 PM, michnow wrote:

    Nothing was said about the tax increases and the proliferation of regulation yet to unfold.

  • Report this Comment On May 19, 2010, at 9:43 PM, redneckdemon wrote:

    I would be interestig to see what the GPD numbers look like when not taking into account government spending. Especially since that money either comes from us via taxation, or is printed nice and fresh, expanding the money supply and reducing the value of the greenback.

  • Report this Comment On May 20, 2010, at 6:44 AM, Sadalmelik wrote:

    I'm putting my money on the double-dip recession, or at least in the short term (3 months) a steep downturn in the US market. My few and crude indicators have all turned negative recently. Plus, recent events in Greece/Europe give me the heebee-jeebees, and it seems to be infecting other continents too. The US recovery isn't strong enough to withstand all the negative pressure, especially when the government subsidies end. Get ready to buy after the slaughter.

  • Report this Comment On May 20, 2010, at 6:44 AM, galivantstomt wrote:

    Thankfully, the government chose to help get the economy by funneling new funds into private enterprise and to governments. As a result, we have a new and healthy General Motors, Chrysler on the mend, along with those institutions whose collapse might well have brought the economy of the U.S. and for the world crashing down. hrysler. Sadly, heads weren't forced to roll, reorganization, and loss of shareholder value used used as tools to punish the institutions with its becoming a major owner in these institutions, much like happened with GM and Chrysler.

    If the party doesn't water it down or manage to kill it all together, sreong requirements with meaningful capitalization requirements, strict controls over the kinds of activities banks can engage in and mandatory participation in , the FDIC will to much to avoid such a mess again,

    It was only through the actions of federal government that we weren't thrown into another Great Depression.

  • Report this Comment On May 20, 2010, at 8:28 AM, mdc38655 wrote:

    This article reminds me of a Kingston Trio 1060's era song lamenting world problems and poking fun at John Foster Dulles. I can't recall its title. Can someone provide the lyrics?

  • Report this Comment On May 20, 2010, at 12:14 PM, WidgetJG wrote:

    It's called "The Merry Minuet" and the copy I have is from their 1958 album "Live From The Hungry!" The poke at Dulles was in the spoken introduction to the song.

    Lyrics credited to Sheldon Harnick:

    They're rioting in Africa. They're starving in Spain.

    There's hurricanes in Florida, and Texas needs rain.

    The whole world is festering with unhappy souls.

    The French hate the Germans, the Germans hate the Poles.

    Italians hate Yugoslavs, South Africans hate the Dutch.

    And I don't like anybody very much!

    But we can be tranquil and thankful and proud,

    for man's been endowed with a mushroom-shaped cloud.

    And we know for certain that some lovely day,

    someone will set the spark off... and we will all be blown away.

    They're rioting in Africa. There's strife in Iran.

    What nature doesn't do to us... will be done by our fellow man.

  • Report this Comment On May 20, 2010, at 3:03 PM, hbofbyu wrote:

    Give me the double-dip and let's get it over with. Sometimes things have to get worse before they get better. Wait, I think I feel 10 years of malaise coming on.

  • Report this Comment On May 20, 2010, at 4:40 PM, ButterflyOne wrote:

    I'm glad most folks are keeping their sense of humor -- I'm trying not to panic. I lost a lot in the last dip in mutual funds. When they came back enough to where I felt the value was fair I sold and have tried to pick solid stocks. I'm trying to look beyond the hype and know that the companies I have chosen are basically sound. However, I'm a little concerned about ATW, AFL & JNJ because of the latest news. I really do think that not being rocked by the hype is the key. I know I should be buying something, but not sure what @ least I'm holding!!

  • Report this Comment On May 20, 2010, at 6:13 PM, Techlog wrote:

    Double-dip? Yes. Because I don't see a positive sign that we can emerge from the merry-go-round situation we are in. Low employement, but undervalued shares. So companies are buying back their shares intead of creating jobs. It is the best investment for them, interest rate are too low to pack profit at the bank, and economic perspective involve cautious investment and job creation

  • Report this Comment On May 20, 2010, at 8:20 PM, SnapDave wrote:

    Double-dip, yes. Recession, no. Try depression.

  • Report this Comment On May 21, 2010, at 6:32 AM, shortysonicx wrote:

    your article really is annoying bro. don't use the word "market." ick. =/

  • Report this Comment On May 21, 2010, at 8:38 AM, BMFPitt wrote:

    Government handouts are part of the GDP. No one in their right mind believes the government can continue to give handouts at the rate it has been. The GDP has nowhere to go but down.

    We can't have a real recovery until we let the zombies die, let housing become affordable again, and move on.

  • Report this Comment On May 21, 2010, at 8:55 AM, ragedmaximus wrote:

    I think were headed for "THE PERFECT STORM" like the movie where several weather anomalies come together to sink all the boats or in our case.Fresh off 2008 crash the 2010 flash crash Global monetary with greece and just when we think were out of the storm I feel CHINA's BUBBLE is going to EXPLODE when our markets are at their weakest creating "THE PERFECT STORM" might be this year or early next year.

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