Sunday, July 29, 2012

What A Real Recovery Looks Like Part II

Back in March I posted "What A Real Recovery looks Like". Back then there had been plenty of positive talk in the media about President Obama's policies finally having had the desired effect in getting the economy going again. The fourth quarter GDP for 2011 (which then was the prior quarter) was 4.1% (annualized). Certainly this was a strong number which, if sustained, would signal a strong recovery indeed. That, however was not to be the case. Annualized GDP growth posted at 2% for 1st QTR, 2012 GDP followed by 1.5% in the 2nd QTR, 2012. Clearly President Obama will not see the recovery hoped for in time for the election in November.

In the previous post I had compared the Reagan recovery to the Obama recovery for two reasons. First, both Presidents inherited an economic mess with very sharp downturns. Secondly, each President took a very different approach to the recovery making for an interesting comparison. I make this comparison not to make a political point. This is, after all, an economic blog, not a political blog. But contrasting the two, I believe, yields some interesting insights.

You may recall that in March I compared the labor participation rates of the two recoveries. In a strong recovery we would expect to see the participation rate increase while unemployment decreases.

From my previous post:

Below I present two graphs. One is from the 1980's when we clearly had strong GDP and job growth. The other is our current environment. Keep in mind that we currently have a declining unemployment rate. The question is what does it mean in light of the labor participation rate.

As you can see, during the 1980's people entered the labor force as jobs became widely available.

In this recent graph we can see that even as unemployment has declined, so too has the labor participation rate.

The graph below shows the inverse relationship between unemployment and the labor participation rate:

The Wall Street Journal examined this same comparison July 28th, 2012 and noted:

The reality is that the Great Recession ended three long years ago. In this Less Than Great Recovery, the economy shows promise for one good quarter then slows back down. As the nearby chart shows, this is the third straight year of sputtering recovery. Growth of 4.1% in the fourth quarter declined to 2% in the first and now 1.5% in the second. The stock market rose as investors bet that the lousy growth will inspire more Federal Reserve easing.

They also note:

It's important to understand how unusual this kind of weak recovery is. Deep recessions like the one from December 2007 to June 2009 are typically followed by stronger recoveries, as there is more lost ground to make up.

The most recent comparable recession occurred in 1981-1982. Yet as the nearby chart shows, the Reagan expansion exploded with a 9.3% quarter and kept up a robust pace for years. By the 12th quarter of expansion, growth popped up to 6.4.%. At this stage of the Reagan expansion, overall GDP was 18.5% higher versus 6.7% for the Obama recovery, according to Congress's Joint Economic Committee.

Another comparison is the actual job numbers themselves. Reagan had a double dip recession in his first term with negative job numbers soon after his election. It took nearly two years before he went from negative job numbers back to positive job creation, but when it did, it posted a massive 1,114,000 new jobs in September 1983 alone! Certainly an amazing achievement. From that point on job creation numbers in the 100's, 200's and 300's thousands.

That same period in Obama's term in September of his third year produced 202k jobs but has been declining since and has been an anemic 75k average over the past three months.

When one considers that 30 years ago when Reagan was President, both the population and the size of the economy were smaller, the contrast looks even worse.

And lastly, consider this, the New York Times estimates we need to be creating 150k jobs a month just to keep up with normal population growth.

Of course, there are other differences as well between the two eras. The Federal Reserve policies were remarkably different. In a future post I hope to show how the Federal Reserve's current policies are making Obama's job much more difficult than they were under Reagan in a way that may seem contrary to traditional economic thought. But that is a post for another day.

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