WARNING: The Double Dip Recession Has Started

Fans of Seinfeld will remember that at a party, double-dipping is a mortal sin. Americans will soon be reminded that with an economy a double-dip is a prescription for real misery.

A "double-dip" recession, occurs when the economy has a recession, emerges from the recession for a short period of growth, and quickly falls back into recession. The recession of the early 1980s is an example of a W-shaped recession. The economy fell into recession from January 1980 to July 1980, shrinking at an 8 percent annual rate from April to June of 1980. The economy then entered a quick period of growth, and in the first three months of 1981 grew at an 8.4 percent annual rate. As the Federal Reserve under Paul Volcker raised interest rates to fight inflation, and economy dipped back into recession from July 1981 to November 1982.

If you enjoyed the double dip of the early 1980's then get excited because it certainly looks as if we are heading into the second half of a new double dip.

The release of durable goods purchase data by the Commerce Department is just one more indication that the country is on the precipice of  part two of a double dip recession.

The Commerce Department said on Wednesday durable goods orders dropped 3.6 percent, worse than economists' expectations for a 2.2 percent fall. March's orders were revised up to 4.4 percent from a 4.1 percent increase.

While durable goods orders are extremely volatile, details of the report were the latest in a series to indicate the economy remains trapped in the soft patch.

"It's another modestly disappointing data point in a long series of slightly disappointing data points that we've gotten in the last month," said Fred Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.

Its not just durable goods, the housing market continues to wallow in record lows. Also released today was the news that driven by the lack of buyers, the price of new homes continued to deflate.

The economy's sluggish tone was underscored by a separate report showing a decline in home prices in March. The Federal Housing Finance Agency's home price index fell 0.3 percent in March from February. It declined 5.8 percent from a year-ago.

Treasury Secretary Timothy Geithner said recovery in the housing market had a long way to go.

"We've got several more years to go. Again just realistically I think it's going to take time still to heal that," Geithner told Politico in a live interview.

And don't forget about unemployment, in February new unemployment claims fell to a three-year-low (but still unacceptable) 375,000. From there began to rise to the point where in April that weekly figure was back up to 475,000, it now sits at 409,000.

The straw that broke the camels back sending the economy back into a downward spiral is the price of oil. The good news is that according to the US government during the past two years the price of  regular grade gas has declined by eleven cents. The bad news is that the new price, $3.89/gallon is still $.165 higher than it was at the beginning of April, $1.06 higher than last year at the same time, and almost two and a half times what it was when Barack Obama took office.

According to Lazard Capital Markets, this spike is reminiscent of the spike we saw in 2008, which contributed to the recession we are still trying to dig out of.

Oil prices likely to go higher but entering demand destruction range; time to get more cautious. In contrast to the 2008 superspike, where oil prices spiked on runaway emerging market demand, the latest spike has been driven by supply issues as Middle East instability worsens. With unrest spreading from Egypt to Libya and Oman (and concern over possible unrest in Saudi Arabia), we believe oil prices could go significantly higher from current levels. Our price elasticity models indicate oil prices could spike to $160+/Bbl if we lost all Libyan production and one half of Saudi production.

That said, we are near levels where the market begins to worry about negative impacts on the economy (~ 5% of global GDP), which we believe warrants a more selective investment stance based on our analysis of the prior oil price spike cycle in 2008.

Since this scenario is somewhat different, being based not on demand but on supply, it is unsure whether or not it will have the same impact. But if you're looking at the oil price just in terms of GDP, we're nearing the point where things could turn ugly.

This particular oil spike may end up being different than the one in 2008, but facts also prove that  every rescission we have had since the mid-1970s has had an accompanying spike in oil prices.

Economist Jeffrey Rubin said in 2008:

Curiously, an over-500% increase in the real price of oil gets virtually ignored as a culprit behind today’s economy, eclipsed by the ongoing crisis in financial markets. Yet the run-up in real oil prices this cycle is over twice the spike in oil prices that occurred during the first or second OPEC oil shock. And those oil shocks produced two of the deepest recessions in the entire post-war period, including the 1980-82 double dip.

The price of oil influences more than how you heat your house or drive your car.  Since most manufacturing uses oil in at least some of their manufacturing process, even if it just to get product to the market. Basic food items are already in an inflationary period,  this oil spike will makes it worse. What may end up being exactly the same as 2008 is that people will have to choice between bank payments and basic staple items whose costs were driven up by their energy costs.

So what is the Obama administration doing to retard the increase in costs? According to the House Oversight and Government Reform Committee absolutely nothing.

Earlier this week they issued a scathing report about the nation's energy saying in part that the President has deliberately created policies which would cause energy prices to rise.

"The United States has the largest reserves in the world—resources that can provide good paying American jobs and fuel our economic expansion. But standing between that energy and U.S. consumers is an obstacle course of government red tape, regulation, delays and obfuscations," Chairman Darrell Issa (R-CA) said. He pointed to statements by President Obama and Energy Secretary Chu about intentionally raising energy costs for Americans and how these goals are being implemented throughout the government.

One of the Obama administration's first moves was to cancel contracts to exploit our shale oil reserves:

Interior Secretary Ken Salazar has canceled leases for energy exploration on 77 parcels of federal land in Utah, confirming that this White House is indeed a Small Oil administration.  

The previous administration, which was not beholden to environmental special interests and seemed to understand the importance of energy, had released 130,000 acres of largely uninhabited — and uninhabitable — land for oil and gas exploration.

Some of the parcels are in or near the Green River Formation, an oil-rich region in Colorado, Utah and Wyoming that has the largest known oil shale deposits in the world, holding from 1.5 trillion to 1.8 trillion barrels of crude.

As the United States continues to struggle through what is at best a weak, jobless recovery we are approaching the next economic crisis caused by higher oil prices. This crises may have had its start from the fear that the "Arab Spring" will cut off oil supplies but our President continues to put roadblocks in front of the only solution to this and the series of oil crises we have had since 1973--- drilling for the oil we have.