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Is the Recession Over?

By Peter Philips, professor and chair, Department of Economics, University of Utah

Recently released statistics indicate good news and bad news which turn out to be the same news: the Great Recession is over. All recessions come to an end. The fact that this one has ended is the good news. The bad news is that when recessions end all this means is that we have hit bottom. The question now is: do we bounce back up or do we crawl along the bottom?

This is the key question I was asked to address in three separate presentations to the International Union of Operating Engineers in Oakland, California, the Transworld Snowboarding Conference at Solitude, and the ACG Utah 2010 Growth Conference at the Grand America Hotel in Salt Lake.

One very unique aspect to this recession is that unemployment has risen faster, farther, and from a lower level than at any time since the Great Depression. Fewer unemployed have a possibility of returning to their old jobs. Consequently, both permanent job loss and long-term unemployment are at post-war record highs. Labor force participation rates have dropped more sharply than during any previous post-war recession, and teenage labor force participation has fallen from 46% in 2000 to 26% today. Manufacturing employment which tends to fall in recessions and recover in booms never recovered from the 2001 recession falling throughout the last decade and collapsing in this recession. So, we have dug a very deep hole for ourselves.

But the bottom appears to have been reached. Retail sales, personal income and consumer confidence all appear to have bottomed out in the fourth quarter of 2009. While total employment is still falling, the fall is slowing while hours of work for those who do have jobs is slowly rising. The number of temporary jobs is also increasing.

Unfortunately, because we fell long and far, the recovery will be long and slow. It took 26 weeks for total employment to fall to where we are at now, and if the next rise takes as long as the last fall, we have about two more years before employment levels will re-attain levels achieved in 2007. But, because the soon-to-be-exhausted federal stimulus slowed our fall, our rise may not be as fast as our fall. Furthermore, our last recovery from the 2001 recession took four years and the last labor market implosion was only one-third as deep as the job hole we have dug for ourselves this time. I think it will take about three years as the stimulus fades and the economy fumbles around for private sector demand to replace government spending.

As the economy finally improves, it will be at a higher level of unemployment. With a generation of young people waiting their turn for jobs, and depleted savings forcing baby boomers to extend their retirement dates, the slow crawl back to previous levels of employment will not be enough to soak up all the young coming into the labor market or the old refusing to leave. I think the new “normal” for full-employment will be around 6 percent unemployment three years from now compared to less than 5 percent three years ago.

Finally, there is a small but not negligible chance that the economy will fall back into recession before it fully recovers. The dreaded double dip may be caused by continued weakness in housing hampered by the withdrawal of federal support for mortgage-backed securities. A double-dip also may be precipitated by governments in the Eurozone and elsewhere getting caught in the middle of a tug-of-war. Pulling one end of the rope are social needs driven by high unemployment and an aging population. Pulling at the other end are reduced government revenues constricted by slow growth and consumers attempting to preserve disposable income in a weak labor market by resisting taxes. The noose in the middle is choking debt. All the while speculators are happily lubricating the rope so if a sovereign debt crisis happens, it might happen quick. Whether weak housing or sovereign debt precipitate a double dip, time will tell. We do know that capitalism tends to self-generate growth, but even if it does, imbalances in the global economy may concentrate that growth in emerging economies leaving more advanced economies struggling to find their way.

So the climb out of the hole we have dug will be long and slow. And there may well be stumbles along the way. I think the stock market is irrationally exuberant and should pay more attention to the great 20th Century economist, Yogi Berra who famously pointed out: “It ain’t over till it’s over.”

Reposted with permission from the U’s College of Social and Behvioral Science blog.  Learn more about Peter Philips here: http://www.econ.utah.edu/econ_menu.htm?menuitem=31

  • joan

    Thanks for the essay. It makes me wonder if you think Utah’s recovery will be faster/slower. Is there more room for optimism given our state’s cultivation of high-tech, research-driven industries?

  • dowellv

    @joan Peter Philips replies:

    My view is that the Utah economy was not hit as hard going into the recession because of the lesser role of the finance industry in the state and the somewhat more moderate expansion of real estate values in Utah compared to states west of us. This means we will come out of the recession from a less deep hole compared to California Arizona and Nevada (for instance). However, coming out of the recession may not be much quicker compared to other states. High tech is a cyclically sensitive industry because it produces capital goods which themselves are sensitive to the business cycle. Biotech has a less cyclically sensitive demand for its product but is often dependent on venture capital for its startup or expansion which can fluctuate with the downturn. Medical research more generally is fairly recession proof. But taken as a whole, research driven and high tech industries are not much insurance against downturns of this magnitude.

    On balance, my view is that we will crawl out of the recession hole in tandem with the national economy but we will crawl out of a hole that was not as deep as the ones dug by states more tied in to the real estate or financial boom. Having gone deeper down, these states may well take longer crawling out, but because the US economy is tightly interconnected no one is getting out much ahead of anyone else. The cultivation of research driven industries is nonetheless beneficial not for their possible role in softening the business cycle but for their possible role in long term job growth across business cycles. These are industries in which the US has a comparative advantage and should retain that for some time to come.

    A current chart that gives you an idea of where we are as a US economy in the downturn/upturn process can be found on the website calculatedrisk.com at

    http://calculatedriskimages.blogspot.com/2010/08/employment-recessions-aligned-at-bottom.html

    My reading of that chart is that we are about six months into a recovery process that will take another 24 months barring a double dip recession which means another downturn before we get back to where we were two years ago in terms of employment. There is, however, some real chance (which I would put it around 30%) of a double dip recession which would extend the final recovery out an additional year or more to 36 to 48 months. Do recognize that when we get back to the employment levels of 2007 we will have a larger population so the unemployment rates of the “recovered” economy will not be in the 4% range of the last 10 years but in the 6% to 7% range. Each additional percentage point is one million more unemployed workers. Alas, it won’t be over until it’s over! A vigorous, high growth, low unemployment economy is not in the cards for the next decade in my view.

    Nonetheless, I am optimistic. My optimism lies in 1) my conclusion that probably we will not have a double dip recession and also 2) in the willingness of we as a people to recognize, honor and support those among us who are the unemployed, under-employed, the younger generation going into the labor market for the first time, and others who are carrying a disproportionate share of the burden of this weaker economy.

  • joan

    Thank you for the response. I’m optimistic, too, but I have a job and a relatively safe retirement, so it’s probably easier for me to remain calm admist the crisis. However, I don’t share your optimism about the political system at all. I think we are generally not very willing to support the unemployed and think of them as somehow not worthy; I’m afraid that poverty is seen as a moral failure and the majority view is that any American can succeed given the right work ethic. “Recognize, honor, and support those among us who are unemployed…” I guess I’m not looking in the right places.