Last week's news that the economy is growing again produced a number of reports that "the Great Recession is over." Even if that were true, what follows may be more painful that any economic recovery in living memory.
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If the recession is over, then why does consumer confidence continue to fall, home sales are going south again and unemployment continue to inch up and up?
— Greg, Smyrna, Ga.
There are two possible explanations. One is that the recession isn’t over.
Despite the high-fiving among economic forecasters over last week’s report that the economy began expanding again in the third quarter, one quarter of growth is not enough to mark the end of a recession. And when you take a look inside the report, the 3.5 percent advance in the gross domestic product doesn’t exactly point to an economy on the mend. (Keep in mind this the government’s first attempt at estimating the latest quarter of GDP. This number will be revised twice before it’s considered “final.”)
The biggest gain, roughly 1 percentage point, came from vehicle sales, which surged during the wildly popular, now-ended Cash for Clunkers program. The rebound in the housing market, thanks to the first-time homebuyer tax credit that expires in November, added another 0.5 percentage point. Direct government spending added another 0.5 percent.
Third-quarter GDP also got a big boost — 0.9 percent — from a change in the level of inventories. To avoid getting stuck with piles of unsold goods, businesses continued cutting inventories in the third quarter. But because they've already cut to the bone, they did so at a slower pace in the third quarter. According to GDP math, that's a good thing.
So if you take out the growth that was directly or indirectly paid for by the government, along with the way GDP accounts for changes in inventories, the economy grew by just 0.4 percent. That’s roughly the size of a typical revision by the time the final data is released.
All of which means that most of the “recovery” in the third quarter was essentially a sugar high from one of the most aggressive government interventions in history. If the jolt from the stimulus simply moved up sales of cars and houses that would have happened later this year and next, all we will have done is created a hole in future GDP numbers.
It also turns out that the stimulus — as big as it was — may not have been big enough. About one-third of the $787 billion total went to tax cuts, much of which has only helped offset lost wages. Much of the rest is essentially going to fill a giant, $360 billion hole in state budgets this year and next. That leaves about $140 billion in incremental government spending, or 1 percent of GDP.
When the impact of that government spending begins to wane next year, the hope is that other sectors of the economy such as consumer spending and business investment will kick in. But consumers don’t yet seem ready or able to do a lot of spending. Two separate measures last week showed consumer confidence fell in October. Businesses continue to try to squeeze more profits from the same dollar of sales by cutting costs, which means they're spending less, not more.
Even if they get in a spending mood, consumers don’t have a lot of extra income to go shopping.
The latest data show that overall income was flat in September, despite the tax refund portion of the government’s stimulus program. Without those transfers, wages and salaries fell 0.2 percent.
After the last recession in 2001, some consumers made up for falling wages by borrowing against the equity in their houses or running up credit card debt. That boost to consumer spending is now working in reverse: Credit has tightened considerably and consumers are putting more money toward saving or paying down their credit cards to make up for the fallen value of their homes.
Of course, there's another possible explanation for the mismatch between the economic data and public perception: The recession is over, but the economy is growing weakly and unemployment will keep rising into next year. That’s not uncommon: The end of a recession just means the economy has hit its lowest point. When you’re at the bottom of a trough, looking up at the peak you just slid down from, it usually doesn’t feel much like things are picking up.
It’s encouraging to see reports of an increase in housing construction or industrial production or car sales. But those gains are coming from extremely low levels. Sales of new single-family homes, for example, have been rising. But they’re still at levels last seen in 1995. Worse, though job losses appear to be slowing, the total level of employment is lower than it was before the economy entered the last recession 2001. In other words, all of the job growth for nearly an entire decade has been wiped out.
When recessions end, it takes time for companies to start hiring again. Most want to see a convincing pickup for at least several months before they begin taking on new workers or opening new businesses.
If we are indeed at the bottom of the trough, the question now is, how long will it take to make up for the damage done by the deepest contraction since the 1930s? Here's some quick math:
When the last, relatively mild recession ended in November 2001, the economy continued to shed jobs for nearly two years. It wasn't until February 2005 that the growing economy had replaced the 2.7 million jobs lost to the 2001 recession.
This time around, the job losses have been much more severe — some 8 million and counting. Once those job losses stop, it takes about 100,000 new jobs just to keep up with the growth of the workforce. During the last expansion, the economy created roughly 160,000 jobs a month. During the previous 1990s expansion, the longest in history, the economy created roughly 200,000 a month. At that rate, it would take six and a half years to create enough jobs to keep up with the growth of the workforce and replace the jobs lost to the recession.
Even if this is “the bottom,” it will be years before the economy creates enough paychecks for consumers to once again add convincingly to GDP. Until that happens, it will still feel like a recession — even if the data shows the economy is growing again.
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