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Why Growth Still Feels Like Recession

Think the US economy's 2% growth is a good news story? Think again: it has to be 2.5% just to stop joblessness rising

Last month, the National Bureau of Economic Research's official business cycle-dating committee told the country that the recession had ended in the second quarter of 2009. This was, undoubtedly, the correct call. The economy is showing positive growth, which is what defines the end of a recession.

However, the growth is so weak coming out of this downturn that it will be invisible to anyone who doesn't spend their life looking at economic data. For most people, this will be a recovery marked by continued high unemployment and near-record rates of home foreclosures. And the politicians' response is to cut people's social security benefits.

It may not be immediately obvious quite how weakly the economy is growing. First, we need a reference point. When an economy gets out of a step recession, it should be soaring, not just scraping into positive territory. In the first four quarters following the end of the 1974-75 recession, growth averaged 6.1%. In the four quarters following the end of the 1981-92 recession, growth averaged 7.8%. The growth rate averaged just 3.0% in the four quarters following the end of this recession.

But the actual picture is even worse. Most of this growth was driven by the inventory cycle as firms went from running down their inventories to rebuilding them. If inventory fluctuations are pulled out, growth in demand averaged just 1.1% over the four quarters following the end of the recession. Final demand growth was down to just 0.6% in the most recent quarter.

This is cause for serious concern. Inventories grew at the second fastest rate ever in the last quarter. Growth is certain to slow in future quarters, meaning that inventories will be a drag on an already slowing economy. Instead of accelerating, we are likely to see growth just scraping along near zero.

This should have people very concerned - and very angry. Just to add enough jobs to keep the unemployment rate constant, the economy has to grow at a 2.5% rate. In the absence of some unexpected change in policy, we will not see the economy growing at this pace any time soon, which means that the unemployment rate will be rising. We can expect it to cross 10% in the not-distant future and likely to remain in double-digit levels through most of 2010.

The outrageous part of this story is that the pain is completely preventable. We know how to create jobs. It is really simple; we just have to spend money - people work for it. Unfortunately, the fiscal scolds, the people who were too lost to see the largest financial bubble in the history of the world, are telling us that we have to cut our deficits and tighten out belts.

It is probably worth noting that nearly all of the fiscal scolds earn at least six-figure salaries and many earn in the seven figures. So, we have an amazing sight here. People who earn hundreds of thousands, or even millions, of dollars a year, who have the job of designing economic policy, completely failed on the job.

This can't be emphasised enough. Missing the housing bubble was an act of astounding incompetence for an economist. This is driving the school bus into oncoming traffic; it is the kitchen cook burning down the restaurant; it is the computer technician causing a complete freeze of the company's systems.

None of these highly-paid, highly-educated people got fired or even missed a promotion. Instead, they are running around telling people earning $20,000-30,000 a year that they have to tighten their belts and accept lower social security benefits.

If politics and the media in the United States were not so corrupt, this would have been topic No1 in the election. Candidates would have been pushing plans to aggressively stimulate the economy and to throw the Wall Street crowd in jail. But a candidate who said such things would not get enough money to run a serious campaign, because you need to court the Wall Street types to pay for a campaign these days. And the media would have ignored and/or ridiculed such a candidate.

So, we have an election based largely on nonsense. People are rightly angry that their lives are being ruined by disastrous economic policy. But they have no idea where to turn. And the latest data tell us that the situation is likely to get much worse in the year ahead.

© 2023 The Guardian
dean baker

Last month, the National Bureau of Economic Research's official business cycle-dating committee told the country that the recession had ended in the second quarter of 2009. This was, undoubtedly, the correct call. The economy is showing positive growth, which is what defines the end of a recession.

However, the growth is so weak coming out of this downturn that it will be invisible to anyone who doesn't spend their life looking at economic data. For most people, this will be a recovery marked by continued high unemployment and near-record rates of home foreclosures. And the politicians' response is to cut people's social security benefits.

It may not be immediately obvious quite how weakly the economy is growing. First, we need a reference point. When an economy gets out of a step recession, it should be soaring, not just scraping into positive territory. In the first four quarters following the end of the 1974-75 recession, growth averaged 6.1%. In the four quarters following the end of the 1981-92 recession, growth averaged 7.8%. The growth rate averaged just 3.0% in the four quarters following the end of this recession.

But the actual picture is even worse. Most of this growth was driven by the inventory cycle as firms went from running down their inventories to rebuilding them. If inventory fluctuations are pulled out, growth in demand averaged just 1.1% over the four quarters following the end of the recession. Final demand growth was down to just 0.6% in the most recent quarter.

This is cause for serious concern. Inventories grew at the second fastest rate ever in the last quarter. Growth is certain to slow in future quarters, meaning that inventories will be a drag on an already slowing economy. Instead of accelerating, we are likely to see growth just scraping along near zero.

This should have people very concerned - and very angry. Just to add enough jobs to keep the unemployment rate constant, the economy has to grow at a 2.5% rate. In the absence of some unexpected change in policy, we will not see the economy growing at this pace any time soon, which means that the unemployment rate will be rising. We can expect it to cross 10% in the not-distant future and likely to remain in double-digit levels through most of 2010.

The outrageous part of this story is that the pain is completely preventable. We know how to create jobs. It is really simple; we just have to spend money - people work for it. Unfortunately, the fiscal scolds, the people who were too lost to see the largest financial bubble in the history of the world, are telling us that we have to cut our deficits and tighten out belts.

It is probably worth noting that nearly all of the fiscal scolds earn at least six-figure salaries and many earn in the seven figures. So, we have an amazing sight here. People who earn hundreds of thousands, or even millions, of dollars a year, who have the job of designing economic policy, completely failed on the job.

This can't be emphasised enough. Missing the housing bubble was an act of astounding incompetence for an economist. This is driving the school bus into oncoming traffic; it is the kitchen cook burning down the restaurant; it is the computer technician causing a complete freeze of the company's systems.

None of these highly-paid, highly-educated people got fired or even missed a promotion. Instead, they are running around telling people earning $20,000-30,000 a year that they have to tighten their belts and accept lower social security benefits.

If politics and the media in the United States were not so corrupt, this would have been topic No1 in the election. Candidates would have been pushing plans to aggressively stimulate the economy and to throw the Wall Street crowd in jail. But a candidate who said such things would not get enough money to run a serious campaign, because you need to court the Wall Street types to pay for a campaign these days. And the media would have ignored and/or ridiculed such a candidate.

So, we have an election based largely on nonsense. People are rightly angry that their lives are being ruined by disastrous economic policy. But they have no idea where to turn. And the latest data tell us that the situation is likely to get much worse in the year ahead.

Last month, the National Bureau of Economic Research's official business cycle-dating committee told the country that the recession had ended in the second quarter of 2009. This was, undoubtedly, the correct call. The economy is showing positive growth, which is what defines the end of a recession.

However, the growth is so weak coming out of this downturn that it will be invisible to anyone who doesn't spend their life looking at economic data. For most people, this will be a recovery marked by continued high unemployment and near-record rates of home foreclosures. And the politicians' response is to cut people's social security benefits.

It may not be immediately obvious quite how weakly the economy is growing. First, we need a reference point. When an economy gets out of a step recession, it should be soaring, not just scraping into positive territory. In the first four quarters following the end of the 1974-75 recession, growth averaged 6.1%. In the four quarters following the end of the 1981-92 recession, growth averaged 7.8%. The growth rate averaged just 3.0% in the four quarters following the end of this recession.

But the actual picture is even worse. Most of this growth was driven by the inventory cycle as firms went from running down their inventories to rebuilding them. If inventory fluctuations are pulled out, growth in demand averaged just 1.1% over the four quarters following the end of the recession. Final demand growth was down to just 0.6% in the most recent quarter.

This is cause for serious concern. Inventories grew at the second fastest rate ever in the last quarter. Growth is certain to slow in future quarters, meaning that inventories will be a drag on an already slowing economy. Instead of accelerating, we are likely to see growth just scraping along near zero.

This should have people very concerned - and very angry. Just to add enough jobs to keep the unemployment rate constant, the economy has to grow at a 2.5% rate. In the absence of some unexpected change in policy, we will not see the economy growing at this pace any time soon, which means that the unemployment rate will be rising. We can expect it to cross 10% in the not-distant future and likely to remain in double-digit levels through most of 2010.

The outrageous part of this story is that the pain is completely preventable. We know how to create jobs. It is really simple; we just have to spend money - people work for it. Unfortunately, the fiscal scolds, the people who were too lost to see the largest financial bubble in the history of the world, are telling us that we have to cut our deficits and tighten out belts.

It is probably worth noting that nearly all of the fiscal scolds earn at least six-figure salaries and many earn in the seven figures. So, we have an amazing sight here. People who earn hundreds of thousands, or even millions, of dollars a year, who have the job of designing economic policy, completely failed on the job.

This can't be emphasised enough. Missing the housing bubble was an act of astounding incompetence for an economist. This is driving the school bus into oncoming traffic; it is the kitchen cook burning down the restaurant; it is the computer technician causing a complete freeze of the company's systems.

None of these highly-paid, highly-educated people got fired or even missed a promotion. Instead, they are running around telling people earning $20,000-30,000 a year that they have to tighten their belts and accept lower social security benefits.

If politics and the media in the United States were not so corrupt, this would have been topic No1 in the election. Candidates would have been pushing plans to aggressively stimulate the economy and to throw the Wall Street crowd in jail. But a candidate who said such things would not get enough money to run a serious campaign, because you need to court the Wall Street types to pay for a campaign these days. And the media would have ignored and/or ridiculed such a candidate.

So, we have an election based largely on nonsense. People are rightly angry that their lives are being ruined by disastrous economic policy. But they have no idea where to turn. And the latest data tell us that the situation is likely to get much worse in the year ahead.

dean baker