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By Jason Stipp | 06-04-2010 12:33 PM

Are We Headed for a Double-Dip?

TCW chief global strategist Komal Sri-Kumar says the probability is 75%, with deflation likely in the short term.

Jason Stipp: I'm Jason Stipp from Morningstar. Are we headed toward a double-dip recession? TCW's Komal Sri-Kumar certainly thinks that the risk is rising. He did a recent report and he's joining me on the phone today to tell us a little bit about his outlook. He's also joined by Adam Coppersmith, who is on the asset allocation Committee, and they're both Fund Managers on the TCW asset allocation funds. Thanks so much for joining me today guys.

Komal S. Sri-Kumar: Thank you for having us.

Stipp: Sure. First question for you; it's a very timely one. On Friday, the jobs report really disappointed folks because of the smaller number than expected added to the private sector employment rolls. You did a recent report about a double-dip recession and how the risk is rising for that, and you said that the consumer, the private sector is going to be a linchpin in the global recovery. Given today's report about the private sector being pretty lackluster on the employment front, how foreboding is that for the recovery?

Sri-Kumar: Jason, my expectation for a double-dip recession goes back a year. I think I was all alone in June of 2009 when I called for it. And I think we are seeing right now that the initial positive impact of the fiscal stimulus helping with car purchases or home purchases is coming to an end, and job growth, sad to say, was unfortunately never a focus of the Obama stimulus program.

We got carried away by dealing with the environment, with the health-care reforms, which have been defying presidents since Theodore Roosevelt at the beginning of the 20th Century, and finally we got carried away in terms of dealings with other issues quite apart from the oil spill.

So in terms of how we are looking today, the number that you quoted, the jobs report is very, very negative in my opinion. The job growth came almost entirely from the Census workers, so that the private sector job generation turned out to be a disappointment. That's the first point I would make.

Second point, even though the unemployment rate dipped slightly, it was because of workers leaving the workforce, which I think is a very negative development. So I think what we are going to see, Jason, when the figures come out is the so-called U6 unemployment rate, which includes frustrated workers and workers who are employed only part time involuntarily that's going to rise. And keep in mind also that almost one half of the unemployed have been unemployed for six months or more and all of those are very, very negative for the economy, and I would say that the double dip – I have now been saying that rather than just say the possibility is rising, I'm now saying the probability of a double-dip recession is 75%. That is my, by far, the base economic scenario.

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