Are we sliding back into recession?

Robert Barr’s comments from the latest trend tracker:

Is the recovery petering out?  Are we at the onset of another dip into recession?  The latest news seems ominous, and even former Federal Reserve Chairman Greenspan said in mid-July that “the economy hit an invisible wall in early June.”

There are some hopeful signs, however, including a show of resiliency in the well-respected economic activity indexes published by the Institute of Supply Management.  And monetary policy remains in gear for economic growth, with continued low interest rates.

One issue that makes the short-term forecast particularly challenging at this point is the impact Washington is having on the economy.  At a minimum, it’s creating additional uncertainty that makes expanding businesses and hiring more workers at this point in the recovery even more an act of faith that it usually is.

The chief executive of Verizon Communications, Ivan Seidenberg, said it clearly in June: “By reaching into virtually every sector of economic life, the government is injecting uncertainty into the marketplace.”  The result?  More difficulty for business in raising capital, expanding existing businesses, and creating new businesses –the last thing this economy needs now.

Add to that the tax hike in store at the beginning of 2011 with the expiration of the 2003 Bush tax cuts, the uneasiness over the impact of the health care law, and concerns over the expanding federal debt load.  These costs will impede the economic recovery, especially a few years from now, as interest rates rise and the cost of servicing the national debt takes bigger and bigger chunks of our tax revenue.

So it’s easy to talk yourself into a lot of pessimism about the economy.  But will these concerns strangle our nascent recovery?  Will government policy push us into another round of recession over the next year?

Well, probably not, or so we’re thinking.  While we recognize the burden Washington is placing on the economy and would argue that economic growth will be measurably less in the coming year than it could have been with better federal economic policy, we don’t think it’s enough to smother the recovery.  Productivity growth and improved technology keep the recovery going.  As for the 2011 tax increases, they’ll be smaller than those imposed on the economy in the early 1990s, and nobody today speaks of the Clinton recession.  Monetary policy had a lot to do with maintaining economic growth then, and policy today is even more stimulative.

So although we think we’ll avoid a double-dip recession in 2010-11, economic growth over the next three or four years will be underwhelming, we believe.  There are several elements of the Congressional and Administration approach to the economy that are damaging the entrepreneurial climate (see, for example, the labor policies that push up wages through politics and not productivity, the treatment of Chrysler bondholders relative to the auto workers union, and threat of imposing cap-and-trade on American businesses and households) – but we think we’ll get through the next year with the recovery intact and, in fact, stronger than it appears to be now.

But we can’t escape the conclusion that the biggest economic risk may be the continued apparent antipathy toward commercial activity from Washington, coupled with the resulting increase in entrepreneurial uncertainty.

Robert Barr is an economist based in Virginia.


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