Thursday, 12. April 2012
Where to Blame the Crack-up in Jobs Growth?
Last week, Edward Lazear wrote an op-ed in the Wall Street Journal with the uplifting title “The Worst Economic Recovery in History.” Lazear noted that many people have referred to our latest recession as the worst recession since the Great Depression. He then proceeded to make the case that, while we may technically be in an economic recovery, our current recovery is not only the worst since World War II, it is even worse than the recovery in the Great Depression.
That’s a tough one to beat. According to Federal Reserve data, it took 88 months (about 7 years) for industrial production in the United States to muddle through the Great Depression and get back to its previous peak level in August 1929. We’ve only had 51 months since the December 2007 peak in industrial production before our latest recession, and we still aren’t back to that December 2007 peak yet. This is bad, to be sure, but on this basis it’s hard to say our latest recovery is “even worse” than the slow one after the Great Depression, because we just haven’t had the time yet.
But Lazear was making his case in terms of growth rates during the recovery. On that basis, in the 32 months since the latest economic “trough,” industrial production growth has averaged 0.4% per month. This is about one-third the average growth rate in the 32 months following the March 1933 trough at the bottom of the Great Depression.
With the slow growth in recent years, we are seriously lagging the recovery performance after 11 recessions since World War II. Here we are, 51 months (over four years) after the beginning of the latest recession, and industrial production is only at 96% of where it was back at the December 2007 economic peak. Business cycle experts ‘officially’ deem that our latest recession ended in June 2009, and things have been on an uptrend since then. But the last two years have been abnormally sluggish ones, in light of how bad the recession was. For example, 51 months after the peak of ten previous recessions, we’ve never had industrial production below where it was when those 10 previous recessions got underway.
Industrial production is a statistic produced by the Federal Reserve to measure output in a wide variety of industries, as well as in the aggregate. In turn, industrial production is included in the Conference Board’s index of coincident indicators. This index is designed, in theory, to replicate overall economic activity with relatively timely data. (The Conference Board also produces indexes of lagging economic indicators as well as leading indicators.) The Federal Reserve’s industrial production index relies on data from units of physical production, where available, but these data are not available on a timely basis for many industries. So the Fed also relies on estimates of physical production, with those estimates based in important part on historical relationships between employment levels (where data are available) and physical output.
In our latest recession, the Fed’s current estimate show industrial production hitting a bottom in June of 2009, coincident with the NBER ‘experts’ view that this was indeed the trough in the latest recession. So industrial production behaved like a coincident indicator, as it should, at least in theory.
But another member of the Conference Board’s coincident indicators has been behaving badly, at least for a coincident indicator – and this behavior helps illuminate how bad things have been. Historically, total nonfarm payroll employment has been viewed as another coincident indicator. Total employment tends to peak when the overall economy peaks, and it tends to bottom out when the overall economy starts growing again. But in our last two recessions, and particularly our latest, total employment has not recovered like it has in the past.
For example, after the 2001 recession ‘officially’ ended in November 2001, total employment continued to decline for six consecutive months, despite its ‘coincident indicator’ status. And after our latest Big Nasty officially ended in June 2009, total employment continued to decline for eight consecutive months. Since the June 2009 official end of the latest recession, total employment has risen at an average monthly rate of only 0.05%. During economic recoveries, total employment tends to rise faster than the long-term average growth rate, but since June 2009, total employment has risen less than one-third the average long-term growth rate.
In explaining our weak performance, Lazear asserted that threats of higher taxes, an increasing regulatory burden, and higher government spending have been important growth impediments. He also spoke of a failure to pursue ‘aggressive trade policies.’ One thing he didn’t mention specifically, but likely has been a major weight, has been uncertainty over health care reform and its impact on business hiring decisions.
I’m all for a critical look at “Democratic” policies and their effects leading to our latest Great Recession and measly recovery. But I’m also for a critical look more broadly. We have had 133 months since George W. Bush was inaugurated in January 2001. A longer story, but here is a look at the growth in the number of jobs in the U.S. over the 627 133-month intervals we have had since January 1960:
The job-producing ability of the U.S. economy has been through the wringer since 2000. A variety of factors are at work, including national security policy. We will explore some of these factors in future articles.
# # # #Bill Bergman has 10 years of experience as a stock market analyst sandwiched around 13 years as an economist and financial markets policy analyst at the Federal Reserve Bank of Chicago. He earned an M.B.A. as well as an M.A. in Public Policy from the University of Chicago in 1990. Mr. Bergman is currently working with Social Movement Sciences LLC, a new enterprise developing evaluation and funding services for not-for-profit organizations.