Two slow recoveries in the last decade for U.S. economy

According to the Bureau of Labor Statistics, the United States added a seasonally adjusted 117,000 jobs in June. That’s a fairly weak number, but it was higher than expectations after some of the weak economic data that was recently released.

I doubt that the debate over the debt ceiling cost the economy many jobs, but it sure didn’t help add any in the final week or so of the month. Absent that manufactured “crisis”, we might have seen significantly better numbers.

Also worth noting: private payrolls increased by 154,000, which means that 37,000 government jobs were lost.

I’ve been writing a lot lately about the most obvious reason for the ongoing woes of the American economy: the lack of demand.

The lack of demand is largely due to the weak labor market in terms of job losses and wage stagnation (the latter is a trend that has been going on for many years).

Take a look at the graphs here on this page, which come from Calculated Risk, all updated today.

I think it’s better to look at the size of the jobs base and the size of the labor force than to focus on the unemployment rate, which is significantly affected by the labor force participation rate. For example, June’s .1% decline in the unemployment rate is primarily attributable to 193,000 Americans dropping out of the labor force. Still, this graph of the unemployment rate over the last 50 years is revealing. In general, most of the recessions were followed by rather precipitous declines in the unemployment rate. Note, however, that the 1990 recession was long over before the unemployment rate peaked. Sure, employment is a lagging economic indicator — but not that lagging. Note the even more extreme lag after the 2001 recession and the relatively slow decline compared to other recessions.

Have we entered a new paradigm, one in which economic slowdowns are not going to be followed by strong recoveries in the labor market? It appears yes.

This next graph also gives a sense of the magnitude of the job losses in this recession. The economy began shedding jobs in late 2007, a trend which accelerated through 2008. By spring 2009, the curve was beginning to level off. By the end of 2009/beginning of 2010, the economy was adding jobs. The recession officially ended in summer 2009. I think it’s pretty clear that the precipitous declines we’re directly related to a panoply of stimulative policies by the federal government — about $300 billion tax cuts, direct aid to states, food stamps and unemployment insurance, the bailout of automobile makers, etc. But while all those policies arrested the declines and turned job growth positive, they weren’t enough to produce a fast jobs recovery.

But look at this next graph. It’s the same as the one above accept the previous graph has the various post WWII recessions with the trough aligned at the bottom while this one is aligned by the pre-recession peak of employment.

Note that the low point for jobs after the relatively shallow 2001 recession was actually deeper into the cycle than the 2007 recession’s low point. Note also the oddly parallel lines as jobs were added to the economy after the 2001 and 2007 recessions. And keep in mind that after the 2001 recession the number of public sector jobs continued their increases and that the housing bubble was being inflated.

Why was the jobs recovery so slow after the 2001 recession? Why are we repeating that same slow recovery now?

These are difficult questions with many possible answers: changes to global trade, outsourcing, dramatic increases in productivity, etc.

Whatever the case, it’s pretty clear that a slow jobs recovery is the best we can hope for. Historically, recoveries from financial crises are choppy and inconsistent. As government cuts are made, that means fewer jobs in the short run, although over the long term decreased government spending might help reduce deficits. With unemployment rates high and real wages stagnant, there’s downward pressure on consumer spending. The glut of existing homes will continue to depress construction for a couple more years — and new residential investment typically jumps (adding a full point or two to GDP most of the time) after a recession ends.

And I haven’t even mentioned the ongoing banking crisis, the sovereign debt crisis in Europe, or the likelihood of slowing growth in China.

Given the number and size of the economic headwinds we’re facing, it’s surprising to me that the U.S. economy is performing as well as it is.