Weekly Market Update: Week of August 2, 2010
Last Friday, the Bureau of Economic Analysis (or BEA, part of the U.S. Department of Commerce) released updated statistics on economic growth (gross domestic product, or GDP). These statistics cover the overall growth of the economy since the previous quarter but report this growth on an annualized basis. On the bright side, it upgraded the final number for economic growth in the first quarter of this year from 2.7% to 3.7% (the former figure being a second estimate issued back in May). On the “not so bright” side, the preliminary estimate of GDP growth for the second quarter of this year was only 2.4%.
Granted, this second quarter growth number is the first of three estimates which the BEA will release over the next several months, and considerable changes can occur in the number with successive estimates (to wit, note the 1% increase between the second and third/final estimate of GDP growth for the first quarter). But what is concerning is the quarterly trend in GDP growth since the fourth quarter of last year, when it appeared the economic recovery from the Great Recession was in full gear. In that quarter, GDP grew at an annual rate of 5.0%, the type of “pop” which characterizes the initial phase of economic recovery from a recession. However, that was immediately followed by a slower growth rate of 3.7% in the first quarter of this year and (now) a preliminary estimate of an even slower growth rate (2.4%) for the second quarter.
Looking Back at Past Recessions and Recoveries Since World War II
What appears to be a preliminary trend in declining rates of GDP growth has led many to speculate that the current economic recovery is weakening or, among some alarmists, to suggest that we risk slipping back into another (or double-dip) recession. The latter scenario seems very unlikely given the number of stimulative factors at work in our economy such as record low interest rates and record high deficit spending by the federal government. But the fact that we are less than three months away from an important midterm election in the U.S. Congress means that the state of our economy-its relative health and what we should or shouldn’t be doing to sustain recovery-will be hotly debated and in the headlines.
In the two charts below, we plot two measures of economic vitality-GDP growth and overall employment-in a way that allows us to compare the current recovery from the Great Recession (which began in December 2007) to all previous recessions and recoveries that have occurred since the end of World War II (that’s nine total, not counting the Great Recession). In both charts, we use the official starting date of each recession as a reference point for measuring changes in GDP and employment that followed. In both cases, the line that plots cumulative percentage changes in GDP or employment first declines (owing to the effects of the recession) and then rises as the recession ends and economic recovery leads to positive GDP and employment growth. And since we’re primarily interested in how the path of GDP growth and employment for the most recent recession and recovery compares with all others, we’ve left the lines for all nine other recessions and recoveries as the same color and without identifying labels.
The chart above, which plots cumulative percentage change in real GDP, shows how different the Great Recession and our current recovery have been compared to all others. First, GDP declines did not occur immediately as the recession began. Second, the level of cumulative GDP decline ( -4.1%) was the deepest of all recessions post-World War II by a small margin. Third (and in part because of the depth), our path back to a level of GDP we enjoyed as the recession began (see the horizontal line at 0%) has clearly been the longest. In fact, even as of the second quarter this year, we have yet to return to a level of GDP we had achieved in the fourth quarter of 2007.
Another way to analyze the data illustrated in the chart above is to calculate the median and average lengths of time (in months) to go from the official start of the recession to the point where the cumulative change in GDP has reached this “breakeven” line of 0%. For the nine past recessions and recoveries shown, the median time to breakeven is 15 months and the average time is 16.3 months. For the Great Recession and current recovery, we are at 30 months and still not at breakeven, although one more quarter of even modest real GDP growth should get us there. Still, 33 months to breakeven for GDP is approximately twice as long as the combined median or average for the past nine recessions.
The second chart above, which plots the cumulative percent change in nonfarm employment, is a stark illustration of how much the Great Recession and current recovery have differed from past recessions and recoveries in the jobs market. While the cumulative decline in real GDP was slightly worse than any past recession (previous chart), it is clear from the cumulative percentage of job losses that the Great Recession and current recovery have far exceeded any past recession and recovery. The trend in recovery for nonfarm employment is also a concern. After exhibiting a modest recovery earlier this year (part of which may be attributable to temporary Census worker hiring), that trend seems to have stalled. This is another illustration of the “jobs hole” and jobs growth challenge we analyzed in our previous post, “Sizing Up the Jobs Growth Challenge.” From the standpoint of length of time to reach breakeven in terms of nonfarm employment, the median of the past nine recessions is 22 months and the average is 25.2 months. Given the depth of the jobs hole we face today, many economists believe it will take at least 48 months (accompanied by strong economic growth) to reach breakeven from a jobs perspective.
What would normally be a vigorous debate regarding the trends we’ve just reviewed has become a heated argument in part due to the upcoming midterm elections. Since we’ve reached close to the limit of what can be accomplished with monetary policy to stimulate the economy (near 0% interest rates along with a policy of quantitative easing by the Federal Reserve), the debate is focused on fiscal initiatives. In one camp are those who argue we need a second stimulus initiative similar to the $800 billion one enacted soon after the Obama administration entered office. But unlike that stimulus program, which sought to spend money as quickly as possible on things like “shovel ready” public works and construction projects, one difference this time around is to focus on providing businesses with incentives to hire unemployed workers and invest in projects with job creation potential.
In the other camp are those who argue that additional stimulus spending will not have the desired effect in large part because the multiplier associated with this type of deficit government spending (i.e. how many additional dollars of GDP are created for each dollar spent in stimulus) is very low. Supporters of this viewpoint argue that the rapidly growing size of our government deficit and national debt are key causes of the uncertainty that restrain both consumer spending and business investment. They argue that a better alternative to another government stimulus program is to make the Bush administration tax cuts (which are scheduled to expire at the end of this year) permanent, while cutting the size of our deficit through reductions in spending.
As in any political disagreement over an important topic like jobs and the economy, the policy outcome (especially in an election season) is likely to be some of both approaches until the dust settles on November’s elections and the new balance of power between parties in Congress.
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