Double-Dip Recession

What Is Double-Dip Recession?

A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession. For whatever reason, after the initial recession has passed the recovery stalls and the second round of recession sets in just as, or even before, the economy has fully recovered from the losses of the initial recession. One good indicator of a double-dip recession is when gross domestic product (GDP) growth slides back to negative after a few quarters of positive growth. A double-dip recession is also known as a W-shaped recovery. 

Understanding Double-Dip Recession

The causes for a double-dip recession vary but often include a slowdown in the production of goods and services that brings renewed layoffs and investment cutbacks from the previous downturn. A double-dip (or even triple-dip) is a very bad scenario or the economy, only marginally better than a sustained depression. 

A double-dip recession occurs when the economy suffers an initial recession and then begins to recover, but then something happens to disrupt the process of recovery. Major economic shocks, ongoing debt deflation, and new public policies that increase price rigidities or disincentivize investment, employment, or production can often lead to renewed rounds of recession before the economy can recover fully. 

Economic indicators can provide early warning of a double-dip recession. Double-dip signals are signs that an economy will move back into a deeper and longer recession, making a recovery even more difficult. Some indicators of a double-dip recession include high or accelerating consumer price inflation during the initial recession and recovery and sluggish job creation, signs of secondary asset price bubbles yet to burst, or renewed rise in unemployment during the interim recovery.

Inflation Begets Recession — The Early 1980’s

The last double-dip recession in the United States happened in the early 1980s, when the economy experienced back-to-back episodes of recession. From January to July 1980, the economy shrank at an 8 percent annual rate from April to June of that year. A quick period of growth followed, and in the first three months of 1981, the economy grew at an annual rate of a little over 8 percent. The economy fell back into recession from July 1981 to November 1982. The economy then entered a strong growth period for the remainder of the 1980s.

Image by Sabrina Jiang © Investopedia 2020 

These seeds of this double dip recession were laid in the early 1970’s when President Richard Nixon famously “closed the gold window”, breaking the last link of the U.S. dollar to anything resembling a commodity standard. This converted the U.S. dollar into a full fiat currency with zero physical constraints on the ability of the Federal Reserves and the banking system under its supervision to create unlimited quantities of new money. 

This led to high and at times rapidly accelerating erosion of the dollar’s purchasing power throughout the 1970’s, reaching toward 15% consumer price inflation per year by the end of the decade. Persistent inflation in the 1970’s led to a situation known as stagflation, or high unemployment combined with high inflation, and even fears that the dollar might collapse amid hyperinflation or a crack-up boom. 

In 1979, President Jimmy Carter appointed Paul Volcker as Chair of the Federal Reserve with the explicit mission of getting inflation under control. Volcker dramatically slowed the rate of growth in the U.S. money supply to bring price inflation to heel. 

This provoked an immediate, but relatively short, recession through the first half of 1980. Through the second half of 1980 and into 1981 the economy began to recover. Real GDP rose, but unemployment and inflation both remained stubbornly high at around 7.5% and 10% (respectively) through this period. 

With inflation again accelerating in late 1981 the Volcker Fed maintained its tight money/high interest rate policy and the economy re-entered recession. Unemployment rose to 10.8% by the end of 1982. During this time Volcker faced increasingly sharp criticism and even threats of impeachment from the U.S. Congress and Treasury Secretary Donald Regan. 

In the end however, inflation was brought under control and the economy quickly recovered from the recession. Unemployment fell from its peak just as sharply as it had risen, in a V-shaped recovery, and the economy entered a new era of relatively stable growth, low unemployment, and mild inflation later known as the Great Moderation.