That much-feared double-dip might not take place; the flexible labour and capital markets in America will help provide opportunities for those with the courage to take them up

Throughout August, the markets have been terrified of the dreaded double-dip. This spectre has been haunting markets all over the world as investors flee risk for the safety of US Treasuries and German Bunds with ultra-low interest rates and the shiny appeal of gold. But the reality is that the fears are overstated. A double-dip does not seem to be on the cards.
 
To understand the reason why, we first have to understand the nature of the great recession. This recession had two causes. The first cause was the housing bubble. The second cause was the collapse of credit. The housing bubble like other episodes of financial euphoria had the effect of drawing enormous amounts of both capital and labour to what seems to be a very efficient and profitable sector of the economy. As a frenzy in the business cycle reached its peak, a particular sector becomes less productive and less profitable until it collapses.
 
As part of the creative destruction of capitalism, both capital and labour are eventually drawn to other sectors often as a result of new technologies. Sometimes this process can take what seems to be a very long time, but this is only in retrospect. What is happening is not that the economy is going into a double-dip. What is occurring is simply the reallocation of resources.
 
The problem with credit has already begun to heal. Profits of major banks have returned to pre-crisis levels. Certainly there are areas of weakness specifically among American regional banks, which have exposure to commercial property, and European banks, which have exposure to sovereign debt. In contrast the US consumer finance company CIT went bankrupt during the crises and cut off many small employment-generating companies from credit. It has since emerged from bankruptcy. Its shares are up 35% and it raised a $3bn 5-year loan last month. Credit for businesses is finally loosening up generally. According to the Financial Times, "During this year's third quarter, global financial companies - including deposit-taking banks as well as finance companies - will issue as much as $80 billion-$100 billion in debt, more than in either of the first two quarters."

While globally, the credit picture has brightened, the American employment picture has not. The reason is quite simple. It is far easier and faster to reallocate capital than labour. The construction of new homes during the housing bubble created enormous number of new jobs in the construction industry. As it collapsed, these jobs were lost and the situation has not improved.

Some 61,000 construction jobs were lost between May and July of this year. In addition, during that time, another 56,000 posts were shed in ancillary areas - such as makers of wood products and furniture, building products and furniture retailers, and providers of financial services related to property. The losses in construction jobs account for 3 million or about half of the 6.6 million jobs lost since the peak of the housing bubble in 2006.

Manufacturing has lost 2 million jobs, but thanks to global demand often from emerging markets, this sector is beginning to hire.
The real depth of the problem will perhaps never be revealed for the simple reason that many of the construction jobs in the US were held by illegal immigrants. With the collapse of the industry, many of these people have simply gone home. It is estimated that the total number of illegal immigrants declined by 8% of 12 million in March 2007 to 11.1 million in 2009. It has probably declined even further.

The loss of construction jobs is the reason for the length and depth of the recession. The US economy was supported by a housing boom for much of the past decade. The over concentration of labour in one area of the economy cannot be changed overnight. Reallocation of labour takes retraining, often relocation and most important, time. The lag does not mean a double dip. It is just a measure of the height that the economy has fallen.

What the US economy has going for it, which is different from most other economies, are flexible labour and capital markets. The large numbers of foreclosures is not evidence of a problem but evidence of a solution. Foreclosures are evidence of a flexible capital market. It means that the debts are not going to sit on the books of the banks as they did in Japan. It also means that the price of housing will rapidly reach a sustainable level. The flexible labour markets in the United States unlike those in Europe mean that the US economy will rapidly readjust.

In fact we all are already seeing this occur. Over one-third of the new construction incorporates green technologies. Like the Internet boom, the US economy is perhaps already adjusting to a post-fossil fuel world. So in the future the present dip, will only been seen as a dramatic opportunity for those with the courage to take it.
 
(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).