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What Is a Double-Dip Recession?

A double-dip recession occurs when the economy starts to recover from one recession, then slides into another. Also called a “W-shaped recovery,” they’re often more severe due to prolonged periods of stagnant wage, employment and GDP growth. 

Understanding double-dip recessions

Double-dip recessions occur when an initial recession enters a recovery period, then backslides into a second, often more severe, recession. Due to their shape on a graph, double-dips are also called “W-shaped recoveries.” 

Causes of double-dip recessions

It’s important to note a recession’s end isn’t “the end” – it’s when the economy starts rebuilding. During this time, the economy is vulnerable to cash flow and job changes. Even one economic shock can slow production and consumer spending, slash corporate investment and kickstart renewed layoffs. 

The exact cause of such shocks vary, though potential causes include:

  • New or repeating crises like war, oil shortages or global pandemics
  • Product or raw material shortages
  • New policies that disincentivize employment, production or investment
  • Debt deflation or surging inflation

Ironically, fears of a second recession can trigger one if consumer and business spending slows enough. 

Signs of a double-dip recession

It’s easiest to identify any recession, including double-dips, because the National Burear of Economic Research announces it. Indicators include:

  • Accelerating consumer price inflation that sparks cycles of saving or central bank interest rate hikes
  • Surging unemployment that suggests business investment is floundering
  • An inverted yield curve that suggests investors are worried about a possible recession
  • Signs of an asset bubble that could burst, spearheading an economic crash (think the mid-aughts housing bubble)

It’s also common for the stock market to flag ahead of recessions. However, this is an imperfect indicator, as it’s primarily a reflection of investor sentiments. 

How often do double-dip recessions occur?

Double-dip recessions are quite rare – the U.S. has only seen 2 (or 3) in its history. 

The first occurred between January 1910 and December 1914, when the U.S. experienced dual two-year recessions sandwiching a 12-month recovery. 

Some economists argue that periods of contraction and expansion during and after the Great Depression qualify. After the economy’s initial recovery in 1933, it grew for three years before receding from 1937-1938. 

The early ’80s also double-dipped from January-July 1980 and July 1981-1982. The second recession began when the Fed hiked interest rates to 21.5% to curb resurgent inflation leftover from the 1970s. 

How does a double dip recession affect you?

Unfortunately for investors and consumers, double-dip recessions tend to be doubly painful. The second slide prolongs the slog to recovery while job, wage and investment growth stagnate or slide backward. 

For investors, that typically results in two rounds of losses: first in the initial recession, and again in the second. Afterward, the market may spring into recovery or plod along for months or years. 

Because double-dip recessions may occur alongside high inflation, it’s crucial to invest for today and the future. You’ll also want to protect yourself against potential downturns, whether you buckle down or switch to less risky positions. 

What this means for you

Historically, double-dip recessions are exceptionally severe. Because of that, it’s common to hear speculation about a double-dip recession during an ongoing recession or recovery phase. 

However, given their rarity, it’s essential not to act on postulation. Avoid making swift market moves on little or nonexistent information, and consider a long-term, buy-and-hold approach that will weather any storm. 

Disclosures

Q.ai is the trade name of Quantalytics Holdings, LLC. Q.ai, LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of Q.ai's investment advisory services.

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