FRBC: Normal Recovery, Elevated Unemployment Levels
I want to bring two pieces of Federal Reserve Bank of Cleveland research to your attention this weekend. These are almost-not-quite-contradictory papers, in that the headlines appear opposed to each other. As so often is the case, the reality is more nuanced.
The first piece, Not Your Father’s Recovery?, challenges the conventional assumptions that the current recovery is aberrational and disappointing. Using real GDP growth, unemployment, inflation, and the federal funds rate suggests to this Cleveland Fed researcher that the recovery looks consistent with past recoveries — if we use just the data from 1983 onward:
“If all goes according to the usual business-cycle dating procedures, a committee at the National Bureau of Economic Research (NBER) will soon convene to declare that what has come to be known as the “Great Recession” came to an end in June 2009. As we all know, it was a doosie. Beginning in December of 2007, it will have lasted 19 months—the longest downturn since the Great Depression. It will also go down as the deepest as the United States shed 4.1 percent of gross domestic product (GDP) from peak to trough. The unemployment rate more than doubled, rising from 5.0 percent in December 2007 to a peak of 10.1 percent in October 2009.
Now that we are a year into the recovery, and the annual July “benchmark” revisions to the National Income and Product Accounts are complete, the time is ripe for an assessment of the recovery so far. Popular opinion strongly suggests that it has been “substandard.” But what is the standard by which the strength of a recovery can be measured? Some point to a historical tendency for deep recessions to be followed by rapid recoveries and vice versa . . .
There has been much talk about a disappointing recovery in the wake of the Great Recession—that this time it is much slower . . . Real GDP growth is not so different than we might have reasonably expected a year ago. The relationship between output growth and the unemployment rate looks somewhat anomalous, with an unemployment rate remaining higher than history alone would suggest, but not resoundingly so. Core PCE inflation turned out roughly as anticipated over the previous year, as has the Federal Reserve policy of a near-zero federal funds rate.”
The charts here show the impact of only using modern data.
The second research piece looks at employment, and surmises that post crash/post crisis, the “natural rate of unemployment” is now higher, but not nearly as much as many economists have surmised:
“The past recession has hit the labor market especially hard, and economists are wondering whether some fundamentals of the market have changed because of that blow. Many are suggesting that the natural rate of long-term unemployment — the level of unemployment an economy can’t go below — has shifted permanently higher. We use a new measure that is based on the rates at which workers are finding and losing jobs and which provides a more accurate assessment of the natural rate. We find that the natural rate of unemployment has indeed shifted higher — but much less so than has been suggested. Surprising trends in both the job-finding and job-separation rates explain much about the current state of the unemployment rate.”
Interesting food for thought . . .
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Sources:
Not Your Father’s Recovery?
Kenneth R. Beauchemin
Federal Reserve Bank of Cleveland, 09.09.10
http://www.clevelandfed.org/research/commentary/2010/2010-12.cfm
Unemployment after the Recession: A New Natural Rate?
Murat Tasci and Saeed Zaman
Federal Reserve Bank of Cleveland, 09.08.10
http://www.clevelandfed.org/research/commentary/2010/2010-11.cfm
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September 19th, 2010 at 12:44 pm
This crash ain’t over. I wonder what they’ll say when their faces hit the windshield.
September 19th, 2010 at 12:47 pm
Interesting how neither of the Fed pieces choose to examine the American economy against the backdrop of the global economy. It’s as if they took the “big picture” and cropped it down in both time horizons and geographic scope until they could pen stories that fit the Fed’s (Bernanke’s) party line …
And so far as I can tell, nowhere within the Fed is there any acknowledgement of the role that corruption and fraud played in bringing down the system. They persist in the whocoodaknowed mindset, and view this recession as something that “just happened” as a consequence of the bursting of a housing bubble that “nobody” saw coming.
As we have opted to not repair any of the major broken regulatory mechanisms (TBTF, Glass-Steagal, unlimited leverage, no realistic risk management, and politicians being owned by the corporatocracy), it seems to be only a matter of time before the next wave of failures hits, from whence it comes I cannot say (but the disintegration of the EU looks to be the odds-on favorite), and when (not if) it happens, there is no remaining structure of strength that will resist it.
At this point, the only tool left in the Fed’s toolbox is printing money in some form or other, and the only financial strength left in this nation is the strength of the dollar, which is strong mainly due to the weakness in the euro and our status as the global reserve currency. And the Fed’s use of its only remaining tool undermines our only remaining strength.
Any “recovery” is likely to be weak and short-lived. Decades from now, historians may decide that there was really no “recovery” at all.
September 19th, 2010 at 12:50 pm
@Petey Wheatstraw
“I wonder what they’ll say when their faces hit the windshield”
They’ll say “whocoodaknowed?”, of course.
September 19th, 2010 at 12:53 pm
Really pretty amazing, how in these days of global trade where pretty much every company is a multinational (even Mom & Pop shops, courtesy of the WWW), the Fed can look upon our fair nation in isolation, as if it were a thing unto itself, along in the economic cosmos.
September 19th, 2010 at 12:54 pm
dammit. should be “alone in the economic cosmos”
September 19th, 2010 at 2:22 pm
Just the data from 1983 onward? Well, that sort of works if you skip the above-normal job creation during the Clinton presidency but since there is no valid methodological basis for skipping anything let’s just say this is a normal recovery if you only compare it to the previous two beginning in 1999. Works then, just fine.
But compared to all other post-WW2 recoveries/business cycles it remains aberrant, only sufficiently more so that it is harder to gloss by playing games with stats: demand remains relatively slack, sectors rotate out of typical business cycle sequence, job creation is poor, wages are stagnant, poverty is increasing, underemployment is very high and, depending upon how you measure it, growing, etc.
If a recovery it truly is then might as well skip the 20th Century altogether — no point in fooling around when skipping economic periods that disagree with a thesis — and declare the early 21st Century reminiscent of the long depression of 1873-96 with recoveries to match; hell, even includes the same main actors (Europe and United States). Wonder how the researcher’s VAR model would fit that data, eh.
It’s not my father’s recovery, granted, but it could be my grandfather’s.
September 19th, 2010 at 3:23 pm
>> the natural rate of long-term unemployment — the level of unemployment an economy can’t go below — has shifted permanently higher
First, that’s the goal of high-tech automation. (See http://www.asymptosis.com/are-machines-replacing-humans-or-am-i-a-luddite.html … And I do believe we’re living in a time when machines are doing a little less “complementing” and a little more “substitution”. … Now coming to a Wall Street firm near you.)
Second, when the cost of energy rises (in real terms), the cost of someone’s commute will more likely exceed the economic value of hiring that person. We’re looking at more expensive energy costs these days, as the easy-to-reach energy has been mined.
September 19th, 2010 at 4:10 pm
While financial products can be sold by referencing progress from the previous low as if the prior high and resulting losses never existed, GNP is commonly referenced from the previous high, which was the over-inflated balloon that burst. Might there be some benefit from referencing to a rolling average that referenced to neither the over-inflated nor the collapsed? Debate the appropriate period, but a minimum period of a presidential cycle could be a starting place.
A rolling average would create less exciting headlines, less fluff to be sold, but is everyone in the business of creating headlines and selling fluff?
September 19th, 2010 at 4:51 pm
Aside from formal analysis (like the Cleveland Fed’s observations), I keep thinking about other effects of the Great Depression. In particular, about my parents. Both came of age during FDR’s first year in office, and both were marked by the psychological flotsam left when the Depression, and WW2, receded (the best I can say is, they had an expectation of disaster, of scarcity, and lived accordingly).
So I ask an idle question: How much of an effect does the psychological damage done by an event like our current crisis (since sentiment and psychology are elements in the market) play out in future market or economic terms? And are the expectations about that future before a Crash a factor?
What expectations did people have of the future, before the Depression? What future possibilities or opportunities did they perceive that they had lost after 1929? The country had a smaller population; much of our national life was rural and agricultural; the median level of education was lower (please note, I’m not saying that our forebears were poorer and less intelligent).
Today, it’s much the opposite. Our culture (saturated by media that didn’t exist in 1929) teaches a very different population about the American Dream: That everyone has the possibility of ‘striking it rich’, “making it”. I’d guess what defines that is economic security; expensive or exclusive possessions; providing our children with opportunity for education and social access; and more free time to enjoy life, however you perceive that to be. It’s the bit-bucket for our hopes.
This Recession is different than any since the Great Depression (in the fundamentals of its genesis, if nothing else). Its effects have been staggering; they still are. And they aren’t just lost jobs, or possessions, or net wealth — but the sense that your birthright opportunity to live well is gone. That the real future is more work, less money, more fear and uncertainty — and that’s for those lucky enough to have a job. Things like that were a hallmark of the 1930′s, and it’s not a stretch to see today’s families with children who will be affected by the same kinds of anxieties.
The results of trying to compare purely psychological effects of the Great Depression with our current crisis would be interesting but anecdotal at best. Still, I wonder what those effects have — short-term, long-term — on how people perceive investing, saving, and living — and there is data about that…
September 19th, 2010 at 5:04 pm
Isn’t the mission statement of the Federal Reserve “full employment and stable prices”?
Just askin.
September 19th, 2010 at 8:46 pm
“the level of unemployment an economy can’t go below — has shifted permanently higher.”
Don’t be surprise if you see more of this because this is how they explain their failure – through propaganda. Very soon people will see %10 unemployment as normal and will accept it. The FED would put Joseph Goebbels to shame.
September 19th, 2010 at 9:21 pm
the Fed seems to have bought into the idea that offshoring isn’t a problem, so they can’t explain why we can’t seem to get jobs any more. maybe if we eliminated the tax credit for it, it would go away? but that would make TPTB made. and corporatcy wouldn’t approve.
September 19th, 2010 at 10:54 pm
@willid3
Offshoring (and the commensurate rise in “permanent” unemployment) is only a problem if you’re not planning on making any societal changes to accommodate that new reality. As this would likely take us in the direction of more explicit socialism, it seems that we will arrive only if we are dragged there kicking and screaming.
Advancing technology is just the irresistible force to do so. I see no willingness to consider any alterations to the classical labor pyramid, so kicking and screaming it will be.
I’m not making any value judgements here, just stating the obvious.
September 19th, 2010 at 11:05 pm
And it isn’t even offshoring, when you come right down to it — the advance of technology promises to foster another wave of job reductions, replacing all manner of people with automatons — even robot mannikins running cash registers and taking orders at restaurants (to propose a couple of extreme examples), in just another decade (or two at the most).
With fossil fuel prices inexorably rising over the long term, the savings from overseas manufacturing will be eclipsed by the transportation costs, and there will be a new wave of globalization, with factories being situated near the distribution channels and customers. So we will see the jobs return, only to robots instead of people.
But there seems to be a dearth of thinkers willing to consider and propose social reorganizations to accommodate such a profile of industrial activity — that doesn’t reshape the classical labor pyramid, so much as eliminate it.
I suppose one solution is the global banana republic, with a tiny minority owning everything, and a huge teeming mass of impoverished sheeple. That seems to be the direction that things are headed.
September 20th, 2010 at 12:25 am
cn,
w/: “I suppose one solution is the global banana republic, with a tiny minority owning everything, and a huge teeming mass of impoverished sheeple. That seems to be the direction that things are headed.”
two things.
1.) you may care to see this http://www.mgm.com/view/Movie/398/Code-46/ movie..
and,
2.) To achieve which End, exactly, did you think the FedRes was Created?
September 20th, 2010 at 9:13 am
I am beginning to wonder if the natural order of things, societies, is to have a minority that owns everything, and a huge teeming mass of much less well off people below them. Human societies tend to congregate under a leader. If one doesn’t step forward, then one is created, anointed, or elected. And human nature being as it is, we will attempt to gain as much as we can for our own good, so this leader goes about doing just that. The idea of “democracy” is sweet and sincere, but just not possible, in a cyclical economic environment. Those cycles bring about unrest and wealth, and those will be polarized to opportunists. Just seems like human nature to me.
But, let’s give our government credit: in order to stand down a revolt of the many against the few, they do try to throw some crumbs out there, like tax credits for home buyers, car buyers, appliance buyers, and breeders. Those are all things us timid sheeple can do well; spend money that we’re given, and have babies.
September 20th, 2010 at 9:43 am
Not asking this rhetorically… when Congress gave the Fed the goal of “full employment” as part of its mission did it also tell the Fed it should define full employment? Because it seems like a non-economist would look at full employment as “whoever wants a job can reasonably get one.”