We're Not Going To Gdp Our Way Out Of This Recession

August 07, 2009|By JAY HANCOCK

The recession is over, says Newsweek. We're at "the beginning of the end of the recession," says the president.

Maybe. It depends on the definition of "recession" and "is" and "over." Economists - the same folks who tell us pay is up and inflation is tame - can probably make a case.

But evidence putting the lie to this little reverie is set to arrive from the Labor Department at 8:30 a.m. today.

The monthly jobs report may show that unemployment topped 10 percent last month for the first time since 1983. It'll probably disclose that U.S. payrolls shrank by another 300,000 jobs or so, bringing cumulative losses over the last two years to nearly 7 million jobs.

The "recession is over" talk focuses on the gross domestic product - all the stuff we make and sell every week. That is supposed to be growing again this summer after cratering for many months. Maybe it's true. If so, that's better than more decline.

But it won't offer much help to the millions of unemployed Americans. They're not going to tell you the recession is over until they start getting hired, or at least start seeing their neighbors getting hired. And that might not happen for a while.

In recent decades there has been a weird disconnect between GDP growth and job growth after recessions. Traditionally, when GDP started growing again, employment quickly followed.

Not any more. Or at least not in the last two slumps. The slow rebound in the early 1990s was dubbed "the jobless recovery," helping bounce President George H.W. Bush from office after he tried to equate mere GDP growth with a real upswing.

The employment recovery from the 2001 recession was even worse. Economic output resumed expanding at the end of that year, but employment kept falling and falling and falling. Once the recession was officially declared over, it took the country more than three years - 39 months - to replace all the jobs that had been lost.

From World War II through the 1980s, by contrast, the average jobs-recovery period after each recession was only 9 1/2 months.

This comeback will be light on jobs in a manner similar to the previous two, many analysts believe. "The mother of all jobless recoveries" is the dire shorthand.

"In the past, businesses would hold on to their workers during recessions, figuring they would need them when business improved," economist and market strategist Ed Yardeni wrote in a note to clients this week. "This time, businesses seem to be betting that when their sales recover, they'll be able to increase output with greater productivity" - not more workers.

Making more per worker is great over the long term. It leads to richer societies and higher standards of living. But in the short term, it's hell on those who aren't producing.

There's an alternate recovery scenario - one in which employers realize they cut so drastically that they start rehiring sooner than they did after recent recessions. The plunge in output and employment this time was far worse than in the 2001 or 1990-1991 downturns. Maybe the comeback for both will be just as strong, the thinking goes.

But for that to happen, consumers must start spending again as if their houses were still increasing in value. As if they weren't up to their eyeballs in debt. As if they weren't going bankrupt in hordes. As if 15 million of them weren't unemployed.

How likely is that?

There is no Internet bubble or housing bubble on the horizon to bail us out this time, notes Joel Naroff, who runs an eponymous economic forecasting firm outside Philadelphia. Those unsustainable booms helped end previous recessions.

"Households are not going to be using their homes as if they were ATM machines," he says. "You can't just go out and sell a dot-com stock and the next day be able to buy something. Without those kinds of helps, we're likely to see much more modest growth." Businesses, he says, "are going to be very cautious in their hiring."

President Barack Obama probably knows this. Aware of the first President Bush's fate, he draws a distinction between GDP and job growth. Economists who define recessions and expansions using only GDP ought to follow his lead.

"We won't have a recovery as long as we keep losing jobs," Obama said last week. "Eventually, businesses will start growing again and will start hiring again, and that's when it will truly feel like a recovery to the American people."

That day, however, is likely to be much further away than he or almost anybody else would like.

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