What Is a Double-Dip Recession?

Short of a depression, few economic scenarios strike fear in the hearts of investors and the financial community like the prospect of a double-dip recession.

Discover how experts define these unique economic situations, their principal causes, how to differentiate them from other kinds of recessions and how you can best prepare for one.

A double-dip recession is as bad as it sounds.

It’s when the economy hits a recession, begins to recover and then dives back into a recession.

What’s a recession, you ask? A recession happens when the economy slumps. Production drops alongside income and employment.

There are three hallmark elements that make up a recession’s fundamentals:[1]

• Falling economic output–the value of the goods and services made in an economy drops

• Rising unemployment–more and more people are out of work

• Declining living standards–higher prices make it comfortable to maintain our life styles and we trade down or go without

Now, imagine two recessions separated by a brief interlude of economic growth that stalls.

That’s a double-dip recession.

The good news about double-dip recessions is that they’re unusual; the U.S. has only experienced one since World War II, between 1980 and 1982.

There can be a number of reasons for a double-dip recession. Let’s look at a couple of examples.

In the 1930’s, the government spent a lot of money to rescue the country from the Great Depression. It worked. From 1933 to 1936, the economy grew at an average rate of 9% and unemployment fell to 14% from 25%. In 1937, however, the Federal Reserve (the U.S. central bank that looks out for our financial system), out of a concern over inflation, increased reserve requirements for banks (the cash they have to hold to guarantee they can give us our money just in case we all go asking for it money all at once), forcing them to hold onto more cash instead of lending it out. The economy tanked again. It only really recovered after the country ramped up wartime spending.[2]

In 1980, inflation was running around 15% following spikes in oil prices caused by oil-producing countries that stopped selling to the U.S. and other countries. The Fed increased the rate at which banks lend to each other to tighten the money supply and try to rein in prices. That move led to a brief recession and a recovery began in late that same year. Alas, that, too, was short-lived. Again trying to harness inflation, the Fed increased the bank lending rate, landing us in another recession until the second half of 1982. Inflation finally came under control, though the economy and unemployment suffered for a while.[2]

Double-dip recessions when charted look like Ws, and are, in fact, also called W-shaped recessions.

Other recessions have other recovery shapes. For example:[3]

• A V-shaped recovery depicts a sharp and immediate rebound from the shortest recession.

• A U-shaped recovery represents a slower, more protracted recovery.

• An L-shaped recovery is probably the gnarliest kind of situation. This is a sharp decline–a depression– where GDP fails to recover and stays at that level for many months or even years. Case in point: The Great Depression that lasted almost 12 years and finally ended in 1941.

Yes, you certainly can plan for a double-dip recession.

If you believe that a double-dip recession seems likely, you’d be wise to take a close look at your portfolio in order to re-evaluate its resilience. You may want to consider more “defensive” options like a Series I Bonds or dividend-paying stocks.

The prospect of a downturn is also a good time to seek the advice of an experienced financial professional.

Keep in mind that recessions tend to be short-lived, and your investments are better off as long-term bets.