Three Questions about the Recession

Here are three questions widely being asked about the state of the U.S. economy and answers to them:

1. Is the recession over?

This question gets a lot of people mad: how can the recession be over when nearly one in ten job seekers cannot find work and unemployment is rising?  The answer is that a recession is like a flood.  When the water stops rising, the recovery begins.  But early in the recovery, a lot of homes are still under water.  The end of the recession means things have started to improve, not that the recovery is complete.  It is quite likely that the recession soon will officially be declared over.

2.       2. How can there be a jobless recovery?

It sounds oxymoronic, like a “foodless meal.”  A recovery can be jobless because “recession” and “recovery” are defined by changes in production, not in employment.  Production can pick up even as employers continue to lay off workers.  The last two recessions (recession of 90-91 and of 01-02) were followed by many months of poor employment results.  In the 12 months following the official end of the recession of 90-91, employment fell by an average of 20,000 jobs per month.  Following the 01-02 recession, employment fell for the next two years, by 47,000 per month over the first 12 months and by 14,000 over the next 12 months.

The graph below shows monthly changes in employment and a smoothed version of these data from the beginning of 1976 through August 2009.  It covers five recessions.  The second of these, in the early 1980s, followed the first by less than a year; some people talk about the pair as one “double-dip” or “w-shaped” recession.  It is evident from the graph that the current recession is by far the deepest of the five.  It is also evident that employment growth did not pull into positive territory until a long time after the official end of the recessions of the last two decades.  Judging by the official end of the past recessions, we should expect the current recession to be declared over soon.  

source: U.S. Department of Commerce Bureau of Labor Statistics (click image to enlarge)

Earlier recessions were declared over after the loss of jobs slowed but well before the economy started adding jobs.  The rate of job loss now, while still comparable to the depths of the earlier recessions, is much less severe than it was in the early months of 2009.

3.      3. Why do employers continue to shed workers even after they begin to ramp up production?

Another way to frame the same question is this: why does productivity grow so fast early in recovery from a recession?  The answer is that recessions are not just periods of economic deceleration, followed by recovery.  In a recession and its aftermath, the economy changes fundamentally.  Within businesses, owners restructure their activities, trying to streamline the work process and eliminate jobs that make marginal contributions to profit.  They do not rehire marginal workers.  Too, many employers hold on to their key workers even when there is not enough work for them to do.  So when work picks up, they do not hire additional workers.

Beyond the once-and-for-all changes in individual businesses, recessions lead to restructuring of the whole economy.   Marginal firms in each sector go out of business: the weakest producers of lawnmowers and the least popular restaurants are likely to close their doors forever.  And the weakest sectors in the economy, those facing the greatest long-run profit squeeze, may shrink or disappear as well.  So American automobile producers may never again employ as many people as they did in 2006, and GM may not survive.

The news is not all bad, of course.   As some industries decline sharply, others are taking root and expanding.  Every recession has been followed by a recovery and by a return of the unemployment rate to the 4-6 percent range.   But many families suffer for many months until this happens.