Headed for a Double Dip?

What happened to the economy in February? As the New Year got underway, it appeared that the recovery was beginning to stabilize. Just last week, Fed Chairman Ben Bernanke raised a key interest rate a notch, citing improved conditions in the financial markets. The Index of Leading Economic Indicators pointed due north, and the long-battered manufacturing center seemed ready to carry the economy over the finish line.

Well, maybe the economy isn't out of trouble yet. There are plenty of factors that could support a case for a double-dip recession. Back in October, when the third-quarter report on GDP showed that the recession ended with 3.2 percent growth, Nobel Prize-winning economist Joseph Stiglitz warned that the recession was nowhere near over and that the gains would not last through 2010. The economy grew 5.7 percent in the fourth quarter, but pessimists say the figure reflected a big surge in inventories. Business inventories aren't the same thing as job and income growth.

Bernanke is back in the public eye today and tomorrow. On Wednesday, during his annual report to the House financial services committee, he assured the country that interest rates will remain low for a long time. He is slated to appear before the Senate banking committee on Thursday and is bound to face very tough questions about the stubbornly high unemployment rate.

The key issue is small-business hiring, which drives most economic growth. “How do we help small and midsize businesses, because they’re the ones who are going to create the jobs? What is he going to do and the Federal Reserve going to do to help grow this economy?” Senator Bob Menendez of New Jersey told Bloomberg in an interview. A Senate bill setting aside $15 billion in tax breaks for businesses that give jobs to the long-term unemployed will come up for a vote today.

One thing is clear: The economy shows no sign of healing itself. On Wednesday, a report showed that commercial real estate delinquencies more than doubled in the fourth quarter.

There were several indications of economic trouble on Tuesday as well. Consumer confidence fell off a cliff. Expectations for the future dropped to a 10-month low, and hopes for the near future are at their lowest point in 27 years, according to a new study from The Conference Board, an industry group. Lynn Franco, director of The Conference Board Consumer Research Center, cited "concerns about current business conditions and the job market," where the unemployment rate is 9.7 percent. Stocks tanked on the news.

The Federal Deposit Insurance Corp., which deposits at commercial lenders, said the number of problem banks on its watch list last year rose 27 percent. That is bad news because banks are more likely to hoard cash when they are insecure, depriving the economy of much-needed private capital.

There was bad news on the housing front as well. The closely watched S&P/Case-Shiller index showed that unadjusted housing prices in 20 cities fell 18.5 percent in December. The record decline reflected rising foreclosures. “The broad downturn in the residential real estate market continues,” David Blitzer, head of the S&P index committee, said.

The economy will face two big tests in March. The crisis in the sovereign credit market threatens to spread from Greece to Spain and...California. Or Washington. The Federal Reserve is scheduled to end a stimulus program that has been used to support the mortgage market. If housing is this bad now, just what will it look like when the Fed takes away that support?