Economist’s View: A Weak Recovery to Mediocrity
- Nov 08, 2011
The economy continues its very weak recovery, with real quarterly annualized GDP growth of just 0.4 and 1.3 percent in the first and second quarters of 2011, respectively. Real GDP has now grown $721 billion (5.0 percent) since its trough, which is essentially equivalent to the entire economy of Indonesia. Economic conditions remain very difficult for many, especially poorly educated young males, whose unemployment rates remain above 20 percent. The result is a bifurcated recovery, where the recession continues for the young and poorly educated, though it has ended for most older and well-educated households.
We anticipate that U.S. real GDP will grow at roughly 2.5 percent over the next year. This is lower than our previous estimate of 3.4 percent, due to additional political uncertainty associated with the upcoming election cycle. Sadly, the recent theatrical performances involving the “budget freeze” and “debt ceiling” have exhausted our belief that political sanity would prevail. We have seemingly become Japan, where posturing trumps meaningful policy, opposition (including from one’s own party) trumps judgment and pork trumps everything.
Total Payroll employment peaked in January 2008 at nearly 138 million jobs, bottoming two years later at 8.75 million fewer jobs. We regained 2.1 million through September 2011. In comparison, the Household Survey, from which unemployment statistics are calculated, indicates that employment peaked in November 2007 at about 146.6 million jobs, bottomed in December 2009 with 8.6 million fewer and then also grew by nearly 2.1 million. Government tinkering has resulted in a much slower labor market recovery than after previous recessions.
Monthly Payroll employment grew for 12 consecutive months through September 2011, generating an aggregate of 1.5 million new jobs during that period. The largest job increases occurred in February (235,000), March (194,000) and April (217,000). Based on the Household Survey, the unemployment rate stood at 9.1 percent in September, 100 basis points below the 10.1 percent peak in October 2009.
Due to the absence of a stable political environment, we have dramatically lowered our forecasts to 1.6 million jobs in 2011, 1.8 million in 2012 and 2.9 million in 2013, well below the 3 million to 3.5 million a year that would otherwise occur. And the estimate of 2.9 million jobs for 2013 assumes that we will see some degree of political sanity return after the election. If that does not occur, our estimate would be just 2 million new jobs in 2013. Assuming political sanity overtakes political vanity post-election, these estimates imply that by the end of 2013 total jobs will be on par with the end of 2006 (before the peak), even though the population will be larger by 20 million. These estimates also mean that the unemployment rate at year-end 2013 will still be 8.25 to 8.5 percent. Hence, our mantra remains: an employment recovery to uninspiring mediocrity.
Yet for all of our problems, the situation in Western Europe is even worse. Not only are they as politically muddled as the United States, but their financial system is far weaker, and the Euro system is fatally fl awed. Far from honoring the 3 percent deficit rule of the Maastricht Treaty, Euro member countries have exceeded this treaty threshold more than 100 times in the past decade with impunity, and there is neither a clear consensus on how this profligacy will be funded, nor by whom. In fact, there is no clear consensus as to whether the Euro-zone is even worth saving.