The (Unusually) Long Road to Recovery

Recoveries after recessions in the past have been speedy, but the great recession’s recovery has bucked this trend. A variety of factors came together to make this comeback particularly tricky.

Although the colloquial definition of an economic recession is two consecutive quarters of GDP contraction, the National Bureau of Economic Research uses a variety of metrics to officially determine whether or not the economy is in a recession. According to the NBER, a recession is the period between a peak and a trough in economic activity. Additionally, recessions can include periods of expansion followed by further contraction, and vice versa.

The latest recession, according the NBER, ended in June of 2009, 18 months after it began in December 2007. This announcement included a caveat though, stating, “The committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity.” Three years after that decision, in April of 2013, economic conditions are better. But the recovery is still anemic at best. Low unemployment rates mask low labor-participation rates. Low interest rates still haven’t convinced firms to resume investment. And public debt worries threaten to make the path even steeper.

Experts question the strength of the recent economic recovery. One economist, John Taylor, compares actual GDP since the recession to potential GDP – his measure of where GDP growth should be, without the recession. Even fourteen quarters after the recession began, the actual GDP is showing no signs of catching up to potential GDP. Following previous recessions, GDP returned to potential much faster: between five and ten quarters after the recovery began for recessions in 1893-94, 1907-08, and 1981-82.

 

                                     Economics One, John Taylor

 

According to recent data from the St. Louis Fed, the employment-to-population ratio has stagnated. This contrasts with previous recessions, where the employment-to-population ratio rebounded quickly. The ratio remains low despite a falling unemployment rate, which may indicate that many are giving up their job searches.

 

      St. Louis Federal Reserve

 

The recovery has been this slow for a variety of reasons. First, the Eurozone has been experiencing a persistent financial crisis. The EU as a whole is America’s largest trading partner, accounting for $636 billion in imports and exports in 2011. As conditions in the EU continue to sour, the U.S. economy will be in jeopardy. European GDP has continued to lag behind America during the recovery. While the United States continued to grow through 2012, the Eurozone contracted again, shrinking 0.3% percent on the year. Eurostat recently reported that the Eurozone reached record high levels of unemployment in February, peaking at 10.9%. European weakness will continue to drag down the recovery until their substantial sovereign debt problems clear up. Ineffective leadership and emerging crises such as Cyprus will complicate their recovery and, in turn, the U.S. recovery.

Domestically, Congress’s poor response to our growing national debt has slowed down the recovery. Political standoffs over raising the debt ceiling and avoiding the fiscal cliff have lowered consumer confidence and increased uncertainty. Despite high first quarter job growth, April employment numbers showed a lackluster 88,000 new jobs created, and another fall in the employment-to-population ratio. As both the January 1st tax increases and the brunt of the sequester come into full force through the summer, we may see few new jobs and another speed bump for the recovery. This will also come without providing a long-term national debt fix. With experts wondering how high America’s debt-to-GDP ratio can get without consequence, we may see future slowdowns stoked by either debt fears or further austerity.

Moving forward, there are still reasons to hope for a speedier recovery. March housing numbers have indicated good things are in the works; the Wall Street Journal reported a 2.36% increase in listings since February and a 20.41% decrease in the median age of housing inventory. A housing recovery could bring hope and confidence in a real and lasting change of pace for the economy. Washington must provide a stable, long-term debt solution to avoid the uncertainty and volatility that have characterized our previous budget standoffs. The EU must put in place serious austerity measures and face head-on their own debt issues. If these conditions are met, the economy will surely return to its rightful pace.