Wednesday, June 30, 2010

Another Recession, or a Long, Slow Recovery

Copyright, The New York Times Company

A few economists are saying that we will soon have a second recession. Although I expect the labor market recovery will take years, it will be a recovery nonetheless.

Double-dip recessions have occurred in the past. The severe 1981-2 recession began only a year after the 1980 recession ended. The Great Depression of the 1930s also came in two phases: 1929-33 and 1937-8.

The first phase of this recession seemed to end in 2009, when real gross domestic product and employment stopped falling in the second half of the year. It is certainly possible that in 2010 we will see a quarter in which real G.D.P. falls a bit. Measured G.D.P. increased so sharply at the end of 2009, with hardly any improvement in the labor market, that economists have been suspicious that real G.D.P. was overstated.

National employment will be lower this month than it was in May, largely because many employees are finished working on the 2010 Census. But a small one-time drop in G.D.P. or layoffs at the Census Bureau should not be confused with a new recession, let alone a return to the economic deterioration we experienced after the summer of 2008.

When Lehman Brothers failed in September 2008, the United States labor market was about to get a lot worse – national employment would subsequently fall about seven million over the next year or so. But a number of indicators were already looking bad by September 2008: real private consumption spending had fallen 3 percent since the end of 2007, real spending on consumer durables had fallen 13 percent, the stock market had fallen more than 20 percent (adjusted for inflation) and housing prices had fallen more than 15 percent.

The chart below shows that the past nine months have been different: real private consumption has risen, with spending on consumer durables up almost 10 percent. The stock market is down over the past couple of months but still higher than it was last fall. Inflation-adjusted housing prices are down a bit: 2 percent, according to the Case-Shiller Index.

Based on factors like these, I predict that seasonally adjusted national employment and work hours will be a couple of percentage points higher at the end of 2010 than they are now: that is, we will be weakly recovering from the first recession, not starting a new one.

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