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Archives: A Double-Dip Recession in 2011 is probable

Originally published in April 2011
Simon Nguyen

The U.S. could face a double-dip recession in 2011. After a promising start to the year, the U.S. economy is once again facing strong headwinds. Recent economic data paint a much different picture than the one put forwards by most economists. The biggest development has been the S&P downgrade of U.S. credit outlook. Although such a move has been expected for quite some time, the timing of this announcement is particularly worrisome.

In recent months, the Obama administration has gone to great lengths in touting the progress made by the U.S. economy. This credit downgrade contradicts the rosy picture painted by the administration, and signals investors' skepticism of the U.S. economic recovery. While the U.S. still retains its triple-A rating, the downgrade could force Washington to implement tougher austerity measures and raise interest rates. With the economy still reeling the recession, these measures will seriously derail the recovery.

The recent decision by Saudi Arabia to cut oil output is another sign that a double-dip recession is on the horizon. The crude producer cited weak demand as the reason behind this move. As oil demand is a good indicator of economic growth, this development signals the world economy may have hit a snag. Since the U.S. has been the biggest driver behind strong oil demand in late 2010 and early 2011, this production pullback can be attributed mostly to slowing demand from the world's top economy. High gasoline prices may have led American consumers to cut back at the pump, which could in turn curb demand for other items.

The weak oil demand is only a symptom of a much bigger problem. Despite the Federal Reserve's repeated assurance that inflation in the U.S. is under control, the dollar is clearly losing its purchasing power. Case in point, food and energy prices in the country are rising at a hectic pace. With commodity prices continue to climb higher, it is only a matter of time before businesses pass higher costs to consumers.

Finally, the U.S. employment situation continues to be problematic. After a strong first quarter, the recent weekly jobless claims number shows a sizable jump of 27,000. This comes as a huge surprise as economists had predicted a drop in claims. The disappointing data coincides with the news that the IMF has lowered its 2011 U.S. growth forecast. The odd of a double-dip recession is clearly increasing with each passing day.

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