July 18, 2003
From the desk of Jane Galt:Great Expectations
The Wall Street Journal today has a really, really good piece on the NBER and the end of the recession, which it is officially calling for the fourth quarter of 2001. The NBER looks at a combination of unemployment and GDP growth, which has been lacklustre but steady since the end of 2001.
The National Bureau of Economic Research said the U.S. economic recession that began in March 2001 ended eight months later, not long after the Sept. 11 terrorist attacks.Most economists concluded more than a year ago that the recession ended in late 2001. But Thursday's declaration by the NBER -- a private, nonprofit economic research group that is considered the official arbiter of recession timing -- came after a lengthy internal debate over whether there can be an economic recovery if the labor market continues to contract. The bureau's answer: a decisive yes.
When calling the end to a recession, the NBER focuses on several economic indicators, but two have been especially important: changes in employment and gross domestic product, which is the value of the nation's output of goods and services. Since the fourth quarter of 2001, GDP has expanded slowly but consistently -- rising 4% through March of 2003.
Employers, however, have eliminated 938,000 payroll jobs since November 2001. In addition, 150,000 people have dropped out of the labor force because they are discouraged about their job prospects, according to the government.
. . .
"It has been an inadequate recovery," said N. Gregory Mankiw, chairman of President Bush's Council of Economic Advisers, who served on the NBER committee that determines recession dates until he joined the Bush administration earlier this year. He said the White House is expecting growth to accelerate to a rate of slightly less than 4% in the months ahead, which should begin to bring down unemployment.The group's long-running debate on the timing of the recession sheds light on broader structural shifts that have made this business cycle much different from previous cycles and on how the economy responded to the shocks of Sept. 11.
In typical recoveries since the end of World War II, economic output has bounced back sharply as businesses rushed to rebuild inventories and invest in new equipment. With demand for their products and services growing more quickly than their ability to produce, managers soon started hiring additional workers.
This time, economic growth has been unusually slow -- a product of intense competition from abroad, the hangover from the technology and stock-market collapse, terrorism concerns and other factors. At the same time, the productivity of workers has been unusually strong, meaning that business can meet sluggish demand for products while still eliminating jobs. The result has been a recovery in the eyes of economists that doesn't feel like one to many workers.
"This is meaningless from the point of view of people worried about their jobs, but meaningful for economic researchers," said Lawrence Mishel, president of the Economic Policy Institute, a left-leaning Washington think tank.
. . .
"In terms of the decline in output, it ranks as a relatively mild recession," said Robert Hall, a Stanford University economics professor who is chairman of the NBER committee. "The labor market side is quite different."
. . .
Despite Thursday's announcement, many executives -- still stung by the profit collapse of 2001 and the stock-price decline that came with it -- are only now becoming more confident about the economy. And even they say they are hedging their bets.
. . .
The downturn itself was very shallow, in terms of lost economic output. Mr. Resler estimates that economic output contracted by just 0.6% during the 2001 downturn, the second-smallest output loss on record. It also was among the shorter contractions.
There are various reasons for this. Monetary policy has become more effective at counteracting downturns. Meanwhile, labor markets and pricing have become more flexible, thanks to more than two decades of deregulation. That allows companies to adjust to signs of waning demand. Increased use of technology has added to this flexibility.
But short, shallow recessions are giving way to long, arduous recoveries that do little to improve the job market. In the six quarters since the end of the recession, GDP has expanded on average at a 2.6% annual rate, compared with a 5.3% average expansion during the previous eight recoveries. Meanwhile, the job market's performance during this recovery has been the worst on record.
So why doesn't it feel like the recession is over?
One of the major factors, as the article points out, is that unemployment is a lagging indicator, which is to say that it continues to rise even after the recession is over. (Stock prices, by contrast, are a leading indicator: they start to fall ahead of the recession). And it's lagged more in recent recessions -- the jobs are a lot slower to come back, which is what killed George Bush's father in '92. The recession had been over for a year, but the unemployment numbers were still bad. Remember "the jobless recovery"? We're having another one. We've lost nearly a million payroll jobs since 2000, and it still hurts.
In general, recessions have been getting steadily shallower since WWII. The problem is that recovery takes longer, which is psychologically very hard. Fewer people are out of work -- fer gosh sakes, the unemployment rate is below what some economists used to think was the lowest possible rate of sustainable unemployment. It's well below what continental Europeans enjoy during their booms. But while fewer people may have actually lost jobs, more people fear losing their jobs, for longer. ("Is this recession worst than 1981?" I asked my mother recently. "Every recession is the worst recession when you're in it" was her sage reply.)
For another thing, even if GDP increases at quite a clip, a lot of us aren't going to be able to increase our consumption along with it, because we spent a nice chunk of the nineties increasing our consumption above sustainable levels based on unrealistic expectations. If we were technology workers, for example, we assumed that the demand for our services would be always and forever strong, while the sky-high wages we were able to demand would not attract any new entrants into the job market to compete for our jobs and thus drive wages down. If we had money in the stock market, we figured that it was okay to use our credit cards to buy a 72-inch HDTV system because, after all, our portfolio was going to double every six months, which would leave plenty of money to pay the bill and the accrued interest. If we were homeowners, we took out extra loans on the rising equity in our home on the assumption that it would be easy to sell the house for a comfy profit if we needed to. If we were practically anyone, we assumed that a loan at 7-8% was a good deal because inflation would chew up a lot of that over the life of the loan.
Now inflation is practically nonexistant, the technology job market is glutted, the housing market is stalling out, and we're choked with debt that no measly 3-4% increase in GDP is going to get us out of. A lot of us will be putting any future income increases into paying down debt, not improving our lifestyle, for quite a long time. (And I am included in that number: my decision to attend business school was predicated on drawing a salary a lot higher than a journalist's when I got out.) Even if things get better, they aren't going to get as much better as they were getting just five short years ago. Of course, they were only getting better because we were borrowing part of now's "better" to pay for it. But that doesn't make it easier to face that cabinet full of Top Ramen when you get home from a hard day's work.
So even though the economy is getting better, it feels worse. Though I'm no Austrian, you might call this The Great National Hangover. It won't kill us.
But sometimes, we might wish it would.
Posted by Jane Galt at July 18, 2003 8:09 AM | TrackBack | Technorati inbound linkshi jane,
the issue of debt is an important issue. out of curiosity, given the huge debt that we will ring up over the next decade, (assuming that we don't get some tax raises), how do you think the gov't will go about dealing with it? inflate? another interesting option perhaps?
Jane,
I would be curious if the NBER would have come to the same conclusions if it had used GDP data without hedonic adjustments.
http://stlouisfed.org/publications/re/2002/d/pages/apples_oranges.html
"...A recent study by the BEA reports that 18 percent of GDP is constructed using hedonic techniques...."
Regards, Don
Was it Greenspan who connected the joblessness of the recovery to increased worker productivity? That doesn't seem like something that's about to change.
If the nation FEELS like it's in a recession, regardless of what pundits and experts say, it will have an effect at various levels, including political and economic (e.g., consumer confidence)
This is one case where feelings may well trump facts.
“Was it Greenspan who connected the joblessness of the recovery to increased worker productivity? That doesn't seem like something that's about to change.”
Yup, that’s right---a healthy and growing economy will always result in sizable job loses. The gods of Creative Destruction must be appeased with the sacrifice of a number of victims. That is the eternal norm and it’s best to get use to this harsh fact of life. Nonetheless, the good news far outweighs the bad. We are increasing our standard of living by leaps and bounds. Those who lose their job must simply suck it up and find new employment. Embracing the philosophical premises of a Ned Lud cannot be tolerated. The world doesn’t owe them a thing. A modest social safety net is acceptable, but nothing more.
"If the nation FEELS like it's in a recession, regardless of what pundits and experts say, it will have an effect at various levels, including political and economic (e.g., consumer confidence)
This is one case where feelings may well trump facts."
- - - - -
Consider this claim: "The nation FEELS like it's in a boom period that will continue for quite a while, plus few pundits and experts claim otherwise. This is one case where feelings may well agree with facts." - - circa 1998/1999.
Past Hiring and Current Unemplyment
We can make a list of about two dozen corporations which are the "high visibility" examples of corporate wrongdoing. These companies as a group were not influential enough to cause the economic bubble or to create the economic downturn. But these two dozen cases typify a corporate mindset(regretably widespread in our society) that *did* lead to corporate mistakes -- it's just that these Two Dozen Companies were situations in which the mindset managed to manifest as considerable excess and even fraud.
Regarding the hiring of additional employees, a Two Dozen Company is probably motivated to hire in order to sustain the fiction of its success. Any company of significant size has within its setup a justification for downsizing or manpower reduction *somewhere* within its structure. But a company that is functioning according to stupidity, tomfoolery or outright fraud will hire people(in the case of fraud, to maintain the fraud) when sound business practice would dictate otherwise. The Two Dozen Companies would not *cause* significant unjustified employment, but they would *typify* the less-grotesque mindset throughout the economy that led to *significant* unjustified employment.
So how do we estimate the amount of unemployment that occurs as a result of the economic bubble hangover(other than relying on previous claims about what is the "best" unemployment figure?) This unemployment figure would not indicate a less satisfactory functioning of our society; instead it is a correction due to excess, in which the bubble's unusually ELEVATED employment was in fact a case of economic and societal malfunctioning.
Can any economist explain why debt, in aggregate, is so maligned?
Every dollar that's owed is owed to someone, right?
And, Jane, where is "the housing market... stalling out"? I think it's bound to but I've seen no evidence.
That's true, Bob, but a lot of it is owed to foreigners, which won't prop up demand here.
Basic economic theory: if you run a trade surplus, you have to invest the extra cash overseas; contrariwise, if you run a deficit, you have to sell capital assets to foreigners. We essentially consumed more stuff in the 1990's by promising we'd ship a portion of our future consumption abroad at some later date. Which, IMHO, is fast arriving.
The growth in the housing market seems to be faltering, which is all that's required for a bubble to pop. If indeed we had a bubble, on which I've seen conflicting opinions.
Jane:
"... unemployment is a lagging indicator, which is to say that it continues to fall even after the recession is over. ..."
I think you meant 'continues to rise'.
Indeed, I did, and I thank you for pointing it out. I've fixed it, but will leave your comment as a monument to the ubiquity of typographical error. ;-)
Bob, I'm no economist but I gather from I've read debt is to be maligned because of inflexibility and risk. Those people and firms and governments in heavy debt lack the capacity to help grow the economy. If firms can't meet the interest payments, they'll likely help to reduce GDP and reduce employment. The debt investors and bond holders (other firms and wealthy or older people) aren't the government so they may perceive no incentive to be deliberately countercyclical.
Alright, Brian--
When the credit bubble bursts, and rates head north, won't the firms be happy to have low-rate debt on their balance sheets? Won't the shareholders of the firms that "make it" be swimming in leveraged returns?
What I think shouldn't be as maligned as it is is the US current account deficit.
I'm not an expert but I'm sanguine. Or should that be: because I'm not an expert I'm foolishly sanguine.
I don't see why the US shouldn't have 10, 20, or 30 years of continuous capital account surplus. The nations that allow capital mobility and have relatively good regulation and disclosure should have ongoing asset sales.
As foreign people age they may want to dump some of those US assets if the assets have not become healthy dividend stocks. But realistically, some will start paying good dividends (MSFT?) and it's not everybody European's aim to die with a net worth of zero and demand for US assets may pick up from places like China and Latin America.
US Treasuries? I'm no expert but it sounds like a currency play -- not a fixed income play -- for foreigners and Asian firms and Asian central banks. Should US Treasuries be a long-term investment for European and Japanese individuals? Why would they want the currency risk? I can see European or Japanese mutual funds being interested in US Treasuries, but then I don't consider the time horizons of most mutual fund managers to be truely long term.
Bob, I think you're right about the positive aspects of debt. I'm just saying, if we want GDP growth, it's easier to do if people and firms start from the position of having no debt.
Well, I'm no economist, but the problem I see with consumer debt is -- you are paying with current dollars for past purchases.
Per this quote:
"For another thing, even if GDP increases at quite a clip, a lot of us aren't going to be able to increase our consumption along with it, because we spent a nice chunk of the nineties increasing our consumption above sustainable levels.."
So I don't see a lot of consumer-driven impetus to the economy.
I may be mistaken, but it seem a good portion of "economic recovery" is based on the ability of consumers to "consume" new goods -- and they must have the confidence, not just expendable dollars, to do so.
the debt issue being owed to foreigners is not bad for the us; its actually good---providing that foreigners still want to hold us dollars. after all, we are essentially paying for their services with paper. that is the power of seignorage. the us has it, since the us dollar is the international currency (with to a lesser extent the swiss franc). however, if overseas investors begin to lose faith in the us dollar, due say, to a perception that us eco policies are just plain nuts, then these investors may not be so willing to hold us dollars, but stodgy euros instead. if there is a sea change, with the euro becoming the international reserve currency, than its a whole different ball game. you will possibly get a replay of the australian "banana republic scenario of the late 1980s-early 1990s. that would be a total disaster for the us. in that case, us debt would be a liability (pun intended).
I'm another no economist, but because my job involves driving thruout the greater Milwaukee area all day, I see a lot of economic indicators. Looks to me like an upturn, at least locally.
Plenty of new home construction. Not only in the outer suburbs, but also on empty lots in the inner city. Houses which were boarded up are getting renovated. This isn't all speculation; people are moving in.
Help wanted signs are coming out again. Small shops are looking for machinists and welders. Auto repair shops are looking for techicians, which means people are getting their cars repaired (not as good as buying new ones, but a bit of a leading indicator).
The first thing which caught my eye was lots of appliances by the curb. I have to assume that those refrigerators and stoves (and maybe even the dishwashers) are getting replaced. This should show up pretty soon in the durable goods numbers.
cas, seignorage is profit from issuing currency, not debt. Debt to foreigners still has to be repaid by taxing Americans.
Sounds to me like US firms are, in general, substantially less operationally geared than in the past. The level of staffing, etc, required can be rapidly adjusted depending on performance.
This arguably makes the economy much more resiliant (a "recessions are shorter, BECAUSE the recoveries are harder" thesis)
But it also suggests that the sustainable profit levels in firms should be lower than before (as a higher proportion of costs are short-term variables, and will rise with sales) - a more constant margin than before may be achievable, but the overall level of return could be reduced (depending on what you think the long-term profile of the economy looks like).
hi brian,
"seignorage is profit from issuing currency, not debt. Debt to foreigners still has to be repaid by taxing Americans."
what do you think currency is brian? it is debt the gov't takes on (and that is how it is counted--as a liability). in order to hold us treasury bills, what do you think foreigners have to hold? do they use swiss francs to buy us bonds?
debt to foreigners in the shape of us bonds does not have to be paid off unless foreigners no longer want to hold it. that is the key. gov't can always print more bonds to cover liabilities. that is paper. but will you hold it, in the face of disintegrating exchange rates and the promise of higher interest rates in the future--both of which erode the current capital value of the bond you now have (in terms of your own currency). ay, that is the rub... it is a question of perception. if there is a flight from the dollar...
cas, currency is not debt the government takes on. There is no maturity date and it is not exchangeable for anything but the same amount of currency.
I wouldn't equate debt and currency.
It is currency (not debt) that is never "paid off" to foreigners or anybody for that matter. Of course, what you say about foreigners willing to continue to roll-over expired debt into new debt is true about the effect on currency.
"...A recent study by the BEA reports that 18 percent of GDP is constructed using hedonic techniques...."
Does hedonism really make up that big a part of the economy? I've definitely _not_ seeing my fair share, then! This calls for some sort of government redistribution program, I'm sure...
Triticale - sorry to say this but subjective impressions of what your local part of the economy is doing doesn't tell you much about what the rest of the economy is doing, or even about what your local economy is doing.
I used to have a job forecasting the government's tax take and in the course of forecasting we would talk to tax accountants in Christchurch, Wellington, Auckland and one other regional centre. We'd generally talk to four different accounting firms in each centre, and would generally hear four completely different stories, from slitting of wrists to bouncing optimism, on the same day. Each city would be different again. Since these accountants were basing their opinions on the state of their clients' books, they should have had quite an overview of the economy, but they still didn't agree. Each of us only sees subsets of life, I am glad that your area is doing well but that doesn't mean the national statistics are mistaken.
Surely its possible for unemplyment to go in a high-productivity gain recession.....
It is certainly possible for productivity increases to cause short-term unemployment increases. Over the long run, human capital gets redeployed to newly efficient areas, and new jobs open up.
Also, don't forget that the correlation can go the other way-- increasing unemployment can increase productivity per worker. All you have to do is assume that businesses fire their most inefficient and least productive workers first, and restructure work to become more efficient in an attempt to save costs.
It does seem like the speed of the recession is proportional to the speed of the recovery, and that we've had slower ones recently.
hi brian,
out of curiosity, what do you think "liability" means? the money stock is treated as a liability in monetary system accounting.
"It is certainly possible for productivity increases to cause short-term unemployment increases. Over the long run, human capital gets redeployed to newly efficient areas, and new jobs open up."
And that's where deregulation works wonders. When we can produce the things that we currently consume with a smaller fraction of our workers, we want the leftover workers to start producing things that we've never consumed before. And that means producing things that no one expected or planned for. If people can do that without spending years playing Mother May I, then all will be well.
Otherwise, we'll be in trouble for some time to come. We can't put a stop to the fact that more and more people will learn how to produce what we already consume (such as software; people all over the world are learning how to program, which is a sign that it's time for the geeks that led the way to start doing something else); our only defense against commoditization of all our skills is to dream up new products and open up new skills for us to get in on.
WTF, everyone's channeling Austrian hangover theory.
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