Different thinking required to get out of a different kind of recession


Consumer confidence, as measured by a survey plugged into a magic formula, is at the highest level in nearly five years. Housing prices have risen for the sixth straight month. All is attributed to improvements in employment, something rarely noted in the media over the summer but felt by people all across the US.

The long answer is that everyone who watches this never believed that employment was improving much. Employment growth leading the overall economy hasn’t been the way recessions have run since the end of WWII. That alone tells us that this time is different. What makes it different is important because it highlights what Barataria readers have been clued into since 2007 and urgently since 2008 – that this is at the very least a different kind of economic event.

Call it what you will, but there can be little doubt that different times call for different measures.

Let’s start with the facts. The total number of jobs has grown by 4.7M since the low of January 2010, or an annualized rate of about 1.2% per year. It’s largely treading water, but it’s been enough to drop the headline unemployment rate (U3) from 10.1% to 7.9%. During this time real GDP has expanded by an annualized rate of 1.6%, which is anemic at best.

According to a regression first published here in October 2010, it takes an annualized real growth of 3.3% in GDP to see significant improvements in unemployment – and that if anything, the early 2000s were running far behind this. Has our improvement in jobs simply been a regression to the mean – that is the kind of growth that offsets the anemic performance seen during the “jobless recovery” after the 2001 recession?

It’s always hard to tell when you are in the middle of some major event exactly what that event is. Professionals in the field will tell you how it compares to what they know, which when we are lucky reaches back to the end of WWII. When the event is outside of their experience, however, we are left with responses that don’t necessarily make sense. And that is why the steadily improving jobs picture has gone largely unreported. It shouldn’t be happening – so to many “experts” it isn’t.

We may be seeing a “regression to the mean” where operations that have been running “lean and mean” for a solid decade are starting to feel more optimistic and willing to hire. It may be that the demographics are finally starting to shift as Baby Boomers, the oldest of which are now 65, start to retire. It could also be that a general slowdown in productivity gains, which were very rapid in the 2000s, have started to slow down and more people are needed to pound out a given level of income – after all, yesterday’s productivity gains are today’s unemployment.

But it could also be a sign that something much more fundamental is happening.

Let’s try a simple thought experiment. Say that this is a “Depression” very similar in many ways to the “Great Depression” of 1929-38 or the “Long Depression” of 1878-93. What sort of behavior would we expect? In both of those cases, a major financial bubble driven by technology was what collapsed into the depression in the first place (cars and oil in 1929, railroads in 1878). The population became more urban in both events, with prices increasing first in cities as housing shortages bedeviled a surging population. Job creation led economic growth in each case – it wasn’t until working people had a secure job and a place to live that the economy started to rebound.

From this thought experiment, the event we are traversing our way through is indeed nothing like any recession we have seen since the end of WWII. It is much more like the previous two events now clearly labeled “depressions” – more like the “Long Depression” than the “Great Depression” in its lingering, corrosive effects instead of a sharp downturn.

You never know where the bottom is until you start to climb out of it. For us, the bottom in employment occurred in January, 2010. The bottom for GDP was a year earlier, in 2009, but is not recovering in any kind of robust way. Taking away tremendous federal deficits and home equity withdrawals, the rest of the economy has been shrinking since 2001.

You may not like the term “Managed Depression” or the idea that we are, in fact, in the middle of roughly the fifth depression in US history. But at the very least we have to acknowledge that this event is different from any postwar recession and thus requires very different thinking before we are going to get out of it completely.