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With the announcement on Friday the 27th of August of the downward revision in GDP to 1.6% for the second quarter 2010 the talk of a double dip recession increased among economists and members of the financial press.  Even some of the most bullish economists were putting the odds at 25% or more.  

A recession is commonly held to be two consecutive quarters of negative economic growth.  A double dip recession is a recession followed by positive economic growth followed by another period of negative economic growth.  

In January, the consensus of economists as reported by Bloomberg said that the economy would be up 2.9% in the second quarter.  In July the expected number of the consensus was down to 2.5%, but came in at 2.4% and was subsequently revised downward to 1.6%.  Not good.  At worst the trend is toward another recession.  Unemployment remains stubbornly high at 9.5% and does not include those who have stopped looking for jobs and those who are “under”employed.  Housing continues to disappoint.  It is hard to make the case that the best scenario is anything other than a prolonged period of a stagnant economy—anemic growth or as economist Sol Fabricant coined “growth recession”.  

Economists use the term “animal spirits” to describe the confidence necessary to maintain a healthy economy.  In order to spend money freely, individuals need to have confidence that they will remain employed or will quickly find a job if unemployed.  Bank customers need to have confidence that their money in the bank is safe and the bank is healthy.  Investors need to have confidence that the stock market will mostly go up in order to remain invested.  Finally, citizens need to have confidence in their elected officials to find the right balance between too much and not enough government intervention to steer the giant ship that is the United States.  

Although we do our best to suppress the feeling from late 2008, it is easy to remember when the first money market ever established “broke the buck” and investors did not get all of their money back.  We started receiving gulp-inducing phone calls from clients questioning whether their money was safe in their bank.  Animal spirits at their worst.  

At present, the difference between slightly positive but anemic economic growth and a full-blown double dip recession is slight.  What may be affected are the animal spirits and self-fulfilling worry of a double-dip recession that money should be hoarded and saved for the tough times ahead.  What matters ultimately though is the length of time the economy spends contracting or barely growing.  The Japanese experienced their famous “lost decade” where the Japanese economy did not grow and assets such as stocks or real estate generally deflated from 1991 to 2003.  

While we are somewhat more optimistic of a way out other than a lost decade for the United States, the country needs to get serious about creating a tax and regulatory environment that is good for business and promotes growth.  Simply raising taxes without dealing with the government’s spending addiction will not get it done.