The latest output and unemployment figures for the United States indicate that the recession in this country is very probably finally over, given the usual definitions of the turning points of recessions. Aggregate output fell for the fourth quarter in a row during the second quarter of 2009, but the latest fall was small. All the indications are that American GDP will increase during the current quarter, although not sharply. The unemployment rate actually fell slightly in July. This may be a one-month statistical anomaly since unemployment usually lags the economy, but the rates of fall in jobs and unemployment have been declining for several months now.
The recessions in China, India, Brazil, and a few other countries have also ended, so it strongly looks like the world recession is also over. Some countries, like Spain, have still not turned the corner, but they will be helped by the end of the global recession. It was a severe recession, in many respects the most severe global recession since the 1930s, such as the cumulative fall in aggregate output. But even that only amounted to about four percent. Moreover, it was not the most severe in all the important dimensions. For example, the latest unemployment figure for the US is 9.4%, which is high, but well below the 10.8% reached at the end of 1982 after a severe couple of recessions in the early 1980s. Unemployment will probably continue to rise for a while since unemployment usually lags the turn in output. However, it now appears that unemployment will very likely peak below 10.8%, perhaps well below that previous high. In addition, productivity held up better in this recession than in many others.
While this has been a severe global recession, it is very far from resembling the Great Depression of the 1930s. That depression had a peak American unemployment of 25%, and over a 20% fall in its output compared to the few percentage point falls in output during this recession. The many comparisons made to the Great Depression by economists and others during the dark months at the end of 2008 and beginning of 2009 now look kind of silly- and I said so at the time- although admittedly there was then considerable uncertainty about how bad this recession would become.
Although the severity of the world wide financial crisis was unprecedented (aside from the 1930s depression), the real side of the economy followed traditional recession patterns. For example, as usual, durable outputs, such as of cars, tractors, and houses, fell far more sharply than services, especially than education and health.
Much ink was devoted to the many educated employees of the financial sector who lost their jobs, and they did usually have a tough time, but as in previous recessions the least educated were hit the hardest. As of the end of July, the unemployment rate among high school drop outs was 15.4% compared to 9.4% for high school graduates, and only 4.7% for persons with a bachelors degree or higher. In addition, the percentage point increases in unemployment rates during the past year were much higher for the less educated. Similarly, black unemployment clocked in at a 14.5% rate compared to 8.6% for whites, while during the past year black unemployment increased by 4.6 percentage points compared to 3.4 percentage points for whites. The fraction of those unemployed that have been unemployed for six months or longer, at 34%, is one significant employment statistic that is unusually bad during this recession. This is apparently the highest fraction of long-term unemployed Americans for 60 years.
How important were monetary and fiscal policies instituted during the past year in preventing a far more serious recession? Only time and further research will permit more confident answers to this question, but I will give my tentative opinion. Fed open market policies that bought financial assets from banks and others, and created huge amounts of excess bank reserves in the process gave banks a financial cushion that helped dampen their retreat from risk. Decisions of The Treasury under both Henry Paulson and Timothy Geithner have been a mixed bag, sometimes helping banks deal with toxic assets, while at other times adding to the uncertainty by being erratic and indecisive.
The decisions to let Lehman fail but to merge Bear Stearns and force the merger of Merrill on Bank of America will be debated for a long time. I continue to believe that the bail out of GM and Chrysler by the Bush, and especially by the Obama, administrations were serious mistakes that will eventually cost over $100 billion of taxpayers' monies. It would have been far better to let both companies file for bankruptcy in the Fall of 2008, for they would have emerged from bankruptcy court with lower labor costs and considerably slimmer than they are now. To be sure, Chrysler may have closed shop, not a bad development, and sold its Jeep and one or two other strong divisions to other companies.
Not surprisingly, the Obama administration is taking credit for ending the recession. According to the New York Times, President Obama said that his administration had "rescued our economy from catastrophe". The administration in particular is pointing to the stimulus package- the American Recovery and Reinvestment Act- for the relatively good employment report for July. Yet this stimulus package could not yet have had much direct effect on employment since only about $100 billion, or less than 1% of GDP, of the $787 billion in this package has so far entered the economy. And much of that $100 billion has been directed to service sectors that do not have excessive unemployment rates.
As I mentioned, some Fed and Treasury policies helped a lot, but the capitalist American economy continues to have strong momentum as well. Recessions always end and usually change into booms. While this has been an unusually long recession, the incentives of firms to find profitable opportunities, and the desires of consumers to spend, contributed in important ways to ending this prolonged recession.
Where will the world economy, and the American economy in particular, go from here? Most economists are predicting a flat recovery for the United States that will not take off toward robust growth until late in 2010 or even in 2011. It is notoriously difficult to predict turning points and how fast economies come out of recessions. The 1930s had a fast recovery for a couple of years during 1934-36 before it fell back into another severe depression.
One main reason for pessimism about the strength of the recovery is that banks are generally afraid of taking on additional risks since they still hold many assets of dubious value. In addition, companies are also wary of investing and adding to their employment because of the remaining considerable uncertainty about the economy, and because consumers are continuing to rebuild their wealth portfolios after the hits they took from the sharp declines in stock markets.
I am more optimistic about the world and US recovery than the consensus, although I do not expect a sharp expansion during the next few months. My reasons for greater optimism include the robust recoveries in China, Brazil, and some other countries that will boost world output, and raise demand for US exports. The large excess reserves created by the Fed- some $800 billion- will induce banks to look for more profitable investments than the meager interest they earn on these reserves. The working down of the housing and auto stocks during the past couple of years will result in demand for new residential construction and cars that will stimulate these depressed industries. Firms are still hiring in large numbers, although less than the number they are letting go. One indication of the growing strength of the US labor market is that- as my colleague Casey Mulligan pointed out to me- seasonally unadjusted employment has risen during this summer.
Still, I do have some concerns about the US recovery, beyond the overhang of many billions of dollars of rather worthless assets held by banks. Casey Mulligan has been stressing that the federal government is creating many programs, such as reducing student loan repayments and mortgage payments for persons with low incomes, which discourage the unemployed from finding jobs, and encourage the employed to become unemployed. The proposed caps of various kinds on executive pay, especially in the financial sector, the large government debt being created due to huge fiscal deficits that will put upward pressure on interest rates, the European style reorientation of anti-trust policies toward protecting competitors rather than consumers, the enormous excess reserves that have a considerable inflation potential, the federal government's likely incompetent management of two of the three American auto companies and a major insurance company, and the planned creation of a consumer czar that will interfere with the goods and services offered consumers are examples of policies that are likely to discourage business investment and risk taking.
So legitimate reasons exist for concern about the speed and strength of the recovery of the American economy. However, I worry much more about various regulations, spending, and controls being introduced by the present Congress and by President Obama than by intrinsic difficulties in the American economy.