Yes Virginia, We are in a Recovery

DKW, December 15, 2010

Echoing the question put to New York Sun editor Francis Church in 1897, many ask if we are in recovery. (In second grade at Lapham Elementary, Jack Collier told us that Santa Claus was a myth.) Yes, according to the National Bureau of Economic Research, the arbiters of business cycle demarcation. NBER declared on September 20, 2010 that the recession ended in June of 2009. Since that time, we have had five quarters of positive economic growth. The preliminary estimate for the third quarter 2010 shows 2.0 percent GDP growth, up from the 1.7 percent growth rate of the second quarter.

Five quarters of economic growth is noteworthy in this case for at least two reasons. Firstly, even after five consecutive quarters of positive economic growth, we have not regained prerecession GDP levels, a record setting protraction. Historically, GDP levels recover a quarter or two after the bottom or trough. Even the recoveries following the severe recessions of 1973 and 1981, restored GDP levels in two and three quarters, respectively, after the troughs. This time around, at least thirteen quarters will separate the beginning of the recession and a full recovery. It took eleven quarters to reach prerecession GDP levels in the 1981 cycle. The other post-war recession recoveries were far shorter, between four and eight quarters. Indeed, the depth and duration of the Great Recession has exceeded all post-war recessions.

Secondly, the job recovery has been painfully slow. Statistics show that Wisconsin job gains at this point in the recovery outpace those of the previous recovery. I suggest that in this case the comparables are less than totally helpful. The recovery following the 2001 recession was designated a jobless recovery. It took more than four years to breach prerecession job levels then, with about two years of the recovery showing no job growth. The employment situation through this latest recession and recovery is more dire. Job losses in percentage terms for this recession were much greater than the 2001 recession and even than the 1981 recession. The highest percentage of jobs loss in the 2001 recession registered about 2.5 percent. In the 1981 recession, it was just over 5 percent. Jobs decreased 6.5 percent this time around. Almost three years after the last employment peak, we are still more than 5 percent below prerecession job levels. The current jobs recovery resembles the 2001 recovery path more than the 1981 path. That could put this jobs recovery breach out somewhere in 2014 or later.

So Why Believe?

It's not all coal this holiday season. Most of the observed litany of economic indicators shows broad based improvement. GDP has grown for the last five quarters and will probably reach new heights next quarter. Jobs are increasing. Wisconsin total nonfarm jobs are up 23,200 year over year as this is being written with the new November jobs data. The state has added 34,200 jobs year to date through November, seasonally adjusted.

Industrial indicators are also strongly positive. The ISM manufacturing and non-manufacturing indexes are both firmly in expansion territory at 56.9 and 54.4, respectively (above 50 means growing, above 52 is expansionary), and have been for most of the last year. Even the employment subcomponent of each is now above 50.

The Chicago region ISM equivalent is also solid, up ten points, and higher on all sub-indexes of autos, steel, machinery, and resources. Inventories are growing slowly and the inventory/sales ratio is declining, a possible enticement to ramp up production output.

The mood of the consumer is notably better. Consumer sentiment is climbing on current assessments and future expectations; a happy consumer is a spending consumer. October consumer spending is higher, up 3.6 percent from last year, supported by a 4.1 percent year over year increase in personal income. Retail sales are also higher on a year over year basis, up seven percent, rising for five months in a row.

Suffice it to say that residential and commercial construction are going nowhere, and the near-term prospects are not at all encouraging. Even with record low mortgage rates, nobody is buying. Either they can't buy a new house (not enough down payment or income) or they won't (waiting for further price breaks from distressed sellers or uncertainty about whether or not housing prices have bottomed). Distressed properties and lack of bank loans have kept the commercial market relatively void of activity. In fact, there may be more angst to follow in both segments.

And for the New Year?

Echoing the question put to New York Sun editor Francis Church in 1897, many ask if we are in recovery. (In second grade at Lapham Elementary, Jack Collier told us that Santa Claus was a myth.) Yes, according to the National Bureau of Economic Research, the arbiters of business cycle demarcation. NBER declared on September 20, 2010 that the recession ended in June of 2009. Since that time, we have had five quarters of positive economic growth. The preliminary estimate for the third quarter 2010 shows 2.0 percent GDP growth, up from the 1.7 percent growth rate of the second quarter.

Five quarters of economic growth is noteworthy in this case for at least two reasons. Firstly, even after five consecutive quarters of positive economic growth, we have not regained prerecession GDP levels, a record setting protraction. Historically, GDP levels recover a quarter or two after the bottom or trough. Even the recoveries following the severe recessions of 1973 and 1981, restored GDP levels in two and three quarters, respectively, after the troughs. This time around, at least thirteen quarters will separate the beginning of the recession and a full recovery. It took eleven quarters to reach prerecession GDP levels in the 1981 cycle. The other post-war recession recoveries were far shorter, between four and eight quarters. Indeed, the depth and duration of the Great Recession has exceeded all post-war recessions.

Secondly, the job recovery has been painfully slow. Statistics show that Wisconsin job gains at this point in the recovery outpace those of the previous recovery. I suggest that in this case the comparables are less than totally helpful. The recovery following the 2001 recession was designated a jobless recovery. It took more than four years to breach prerecession job levels then, with about two years of the recovery showing no job growth. The employment situation through this latest recession and recovery is more dire. Job losses in percentage terms for this recession were much greater than the 2001 recession and even than the 1981 recession. The highest percentage of jobs loss in the 2001 recession registered about 2.5 percent. In the 1981 recession, it was just over 5 percent. Jobs decreased 6.5 percent this time around. Almost three years after the last employment peak, we are still more than 5 percent below prerecession job levels. The current jobs recovery resembles the 2001 recovery path more than the 1981 path. That could put this jobs recovery breach out somewhere in 2014 or later.

So Why Believe?

It's not all coal this holiday season. Most of the observed litany of economic indicators shows broad based improvement. GDP has grown for the last five quarters and will probably reach new heights next quarter. Jobs are increasing. Wisconsin total nonfarm jobs are up 23,200 year over year as this is being written with the new November jobs data. The state has added 34,200 jobs year to date through November, seasonally adjusted.

Industrial indicators are also strongly positive. The ISM manufacturing and non-manufacturing indexes are both firmly in expansion territory at 56.9 and 54.4, respectively (above 50 means growing, above 52 is expansionary), and have been for most of the last year. Even the employment subcomponent of each is now above 50.

The Chicago region ISM equivalent is also solid, up ten points, and higher on all sub-indexes of autos, steel, machinery, and resources. Inventories are growing slowly and the inventory/sales ratio is declining, a possible enticement to ramp up production output.

The mood of the consumer is notably better. Consumer sentiment is climbing on current assessments and future expectations; a happy consumer is a spending consumer. October consumer spending is higher, up 3.6 percent from last year, supported by a 4.1 percent year over year increase in personal income. Retail sales are also higher on a year over year basis, up seven percent, rising for five months in a row.

Suffice it to say that residential and commercial construction are going nowhere, and the near-term prospects are not at all encouraging. Even with record low mortgage rates, nobody is buying. Either they can't buy a new house (not enough down payment or income) or they won't (waiting for further price breaks from distressed sellers or uncertainty about whether or not housing prices have bottomed). Distressed properties and lack of bank loans have kept the commercial market relatively void of activity. In fact, there may be more angst to follow in both segments.

And for the New Year?

It appears likely that the Bush tax cuts will be renewed in their entirety. In the deal, unemployment insurance benefits will be extended another thirteen months, the estate tax rate will be lowered, and the social security tax withholding rate will be reduced, among other things. (This is an interesting response to the last election shellacking. Much of the debate seemed to be about reducing the budget deficit. This response lowers taxes and raises spending.)

Coupled with the second stimulus package, QE2 (quantitative easing number two involves $600 billion of treasury purchases by the Fed to put more money into the economy), there should be enough cash in the system to keep the recovery going provided the money gets loaned, spent, and recycled through the U.S. economy. How much of QE2 will stay in the U.S. is unknown. Foreign buyers may take up much of the treasuries and some amount of consumer purchases will be on imports.

Right now banks, corporations, and households are hoarding cash, trillions of dollars. The banks are being told by the Fed to loan the money and by the FDIC to be extremely prudent. Corporations are spending some of their cash trove on new capital equipment and software (labor saving investments), not on production expansions and buildings. They are waiting to rush the liquid assets into the next attractive opportunity, which may or may not be in the States. Consumers have lowered their debt, upped their savings rates, and become more frugal. Each and all of which dampen the economic expansion potential.

All said and done, I think we will continue to see the economy expand and mostly likely at a higher rate, in the three percent range. We are currently seeing some employment growth, income growth, spending growth, and investment growth. QE2 should be another shot in the arm. With the Asian economies, particularly China and India, showing robust growth, our exports should increase.

As employment grows, so will income and consumption. As the European Union recovers, so will our exports. As the housing markets turn up, so will its contribution across many industries. Just getting these sectors off the bottom, will feed directly into GDP expansion, boosting overall growth.

So, yes Virginia, we are looking at a more festive holiday season than last year and a more prosperous new year. And Jack, I still don't believe you.

Written by Dennis Winters, Chief Economist and OEA Administrator. December 2010.