Great recession: R.I.P.
The recession's duration--18 months--is the longest of the postwar era, and underscores the one weakness of this recovery. The economy is in a jobless recovery, with monthly U.S. payroll employment, the broadest economic indicator, continuing to contract, albeit at a slower pace than earlier in the late recession. Earlier in 2009, monthly payroll employment declined an average 691,333 (1Q) and 428,333 (2Q). But monthly job losses have dropped to 179,000 (3Q) and 61,400 (4Q), including the most recent report: a modest 11,000-job loss in November. This is an important development.
It may appear counterintuitive, at first glance, to suggest Great Recession R.I.P. given negative economic news: a weak housing market, tepid consumer spending, record current account deficits, a troubled manufacturing sector, a weak dollar and a malfunctioning credit structure struggling with excesses caused by some derivatives.
Yet coincident indicators peak and bottom with cyclical turning points in the economy. They operate in real time, and are more reliable for calling cyclical turns than the lagging indicator that receives the most media attention: the unemployment rate. One example: the Arkansas unemployment rate, in spring 2008, hit multiyear lows. Our market-based think tank, at that time, declared a recession had been under way since January. Our call missed by one month: the NBER announced Dec. 1, 2008, the recession started in December 2007. The point is that the four coincident indicators are more important for analyzing business cycles than lagging or leading indicator indexes.
Those coincident indicators suggest an expansion started in June. The Federal Reserve's industrial production index measures the physical output of U.S. factories, mines and utilities. It reached an apparent trough in June, and has expanded for four consecutive months.
Industrial production emphasizes the "business (entrepreneurial) side" of the economy. It could even serve as a proxy for the "higher-order capital goods"--or durable goods, including motor vehicles--that the pioneering economist Ludwig Von Mises saw producing the first evidence of "malinvestment" and, ultimately, recession. Mises and Friedrich Hayek, the 1974 Nobel Economics laureate who taught at the University of Arkansas at Fayetteville in the 1950s, developed a complex business cycle analysis explaining its origins in the credit and manufacturing sectors. The late Victor Zarnowitz, a long-time NBER member, discussed their ideas and other cyclical explanations in his 1992 book, "Business Cycles: Theory, History, Indicators and Forecasting" (University of Chicago Press).
Two other coincident indicators tracked by the Conference Board also show expansion since mid-summer. These are real income less transfer payments and manufacturing and trade sales.
Payroll employment is the only coincident indicator still contracting. A jobless recovery also occurred at the end of the last recession. The NBER identified a recession between March and November 2001, but employment declined for another seven quarters before finally reaching a trough in August 2003, according to the U.S. Bureau of Labor Statistics.
In a jobless recovery, the economy is technically expanding but not at a fast enough pace to generate employment growth.
Another piece of evidence to suggest the recession has ended: gross domestic product grew 2.8 percent (2009-3Q) after contracting five of six preceding quarters.
The Arkansas cycle tends to lag the national cycle. It might feel like a recession--at least locally--for months. It's counterintuitive to accept recession at stock market or housing boom peaks, or expansion when negative news is abundant. The coincident indicators, a compass for navigating business cycles, provide guidance.
Greg Kaza is executive director of the Arkansas Policy Foundation in Little Rock (www.arkansaspolicyfoundation.org).
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|Date:||Dec 14, 2009|
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