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The weight of the evidence continues to suggest that the recession has ended (probably in June) and the economy is again growing. There are some serious headwinds, however, which are likely to make this recovery less-than-satisfying. If the political winds were blowing in a more favorable direction (i.e., with true fiscal stimulus focused on increasing the incentives to work, invest, and take risk, rather than bulked-up spending, increased regulatory burdens, and tax rebates) we might expected a fairly dramatic V-shaped recovery, with growth in the range of 6-8% in the coming year. Growth of that magnitude would be a natural result of the degree to which the economy has slowed relative to its trend growth. Instead, it's looking like growth will be on the order of 3-4%, and that will leave the economy below trend and the recovery sub-par, because it will be a long time before firms need to build new capacity.
The progress of the labor market seems to be confirming this. The pace of firings has slowed, but we are still a long way from the point at which which firms begin adding jobs and firings fall to "normal" levels. Recessions can and do end when the pace of firings is still high, as this chart shows, but they don't really feel healthy and satisfying until the recovery sparks demand for new capacity and lots of new jobs. At this rate it could a few years before enough new jobs are added to relieve some of the pressures that still afflict many millions of families, even though the economy will be growing.
3 comments:
Hello Scott,
Greg Mankiws' post on Weds points out that recovery after a banking crisis is different. Along with Pimco's "new normal" theme, and your "headwinds", there is consistency that a recovery could be very limited.
http://gregmankiw.blogspot.com/2009/08/blanchard-on-outlook.html
"The historical evidence is worrisome, however. The IMF’s forthcoming World Economic Outlook presents evidence from 88 banking crises over the past four decades in a wide range of countries. While there is large variation across countries, the conclusion is that, on average, output does not go back to its old trend path, but remains permanently below it. The possible good news is that the trend itself appears to be unaffected: on average, crises permanently decrease the level of output, but not its growth rate. So, if past is prologue, the world economy likely will return to its past growth rate. But, especially in advanced countries, the period of above-average growth, characteristic of normal recoveries, may be short-lived or nonexistent."
Thanks for pointing that out. I think it makes sense. You can view things from different perspectives but arrive at the same conclusion: the economy is likely to recover, but is not very likely to recover all that it has lost and won't re-attain its former trend growth levels for quite some time, if ever.
Still, that does not preclude a recovery with 3-4% growth for the next several years.
But still the recession period is going on at some places.We cannot tell that it has ended.
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