What is a Double-Dip Recession?

A double-dip recession describes a period of time in which the economy goes into recession, briefly rebounds, and then dips back into recession again. The United States experienced this type of recession in the early 1980s. A double-dip recession is sometimes referred to as a W-shaped recession, describing the economic trend line on a graph, showing two pronounced troughs with an uptick in between. The short period of growth in between the two recessionary periods is sometimes referred to as the ‘dead cat bounce.’

A recession is defined as two or more quarters in a row of negative growth, as measured by a country’s gross domestic product. In a double-dip recession, the economy shows negative growth for two or more quarters, positive growth for a quarter or two, and then two or more quarters of negative growth. The recession is not considered completely over until the economy shows more than two consecutive quarters of growth. While countries tend to go into recession independent of one another, if the factors causing the recession affect most of the world, a global recession can occur.

A double-dip recession can sometimes be caused when the government takes overly-aggressive action to stabilize the economy and encourage a recovery. In the recession in the United States in the early 1980s, Federal Reserve Chairman Paul Volker, fearing that the economy would suffer from inflation, raised interest rates sharply. While there was a short-term improvement, the increased interest rates soon caused the economy to decline again, resulting in a double-dip recession. This second dip drove interest rates back down again, resulting in deflation, or a decrease in prices.

Another hallmark of a double-dip is the so-called jobless recovery. This is when most indicators including gross domestic product or GDC, point to economic growth but the unemployment rate remains high. Job growth is a trailing indicator of economic growth, meaning that it occurs after other economic indicators show improvement. Therefore, when other indicators signal recovery, but the expected job growth does not follow, the economy may slide into recession again, producing the double-dip recession.

A double-dip recession tends to be the worst kind, as consumer confidence is eroded when the economy appears to be rebounding, but then declines again. Consumers fear that the recession will be ongoing, and could worsen into depression. This makes a double-dip recession that much more difficult for the economy to come out of.