More than four years after the end of the recession, much of the nation has yet to experience anything resembling a normal economic recovery. The JEC staff prepared the attached analysis that examines just how poorly this recovery stacks up against past recoveries. It also addresses some of the misconceptions that are widely reported regarding the economic impact of the sequester.
For example, the analysis notes that this recovery ranks last or near last on most major economic indicators. Since the recession ended in the 2nd-quarter 2009, real GDP has grown by a total of 9.2% over the four-year period, equivalent to an annualized growth rate of 2.2%. This compares with total growth of 18.2%, equivalent to an annualized rate of 4.3%, in the average post-1960 recovery. And the comparison with the Reagan Recovery is even more startling when real GDP increased by 22.3%, equivalent to an annualized rate of 5.2%, over the comparable period. This places the growth gap for this recovery at $1.3 trillion (2009$) compared to the average post-1960 recovery and $1.9 trillion (2009$) when compared to the Reagan Recovery.
The White House likes to tout its private sector job creation record, noting that there have been 42 consecutive months of private sector payroll jobs gains with 7.5 million private sector payroll jobs added over that period representing a gain of 7.0%. What the White House doesn’t advertise is that the economy still has 1.4 million fewer private sector payroll jobs than in January 2008 when private sector payroll employment peaked. The White House chooses February 2010 as its starting point for calculating its private sector “job creation” record. February 2010 represents the recent low point for private sector employment.
Compared to other post-1960 recoveries, the Obama recovery continues to scrape bottom when it comes to private sector job creation even when using the White House’s starting point. Private sector payroll employment grew an average 11.0% over the comparable period in other post-1960 recoveries. That difference puts the private sector jobs gap for the Obama recovery at 4.3 million compared to other post-1960 recoveries.
The gap is even more pronounced compared to the Reagan recovery when private sector payroll employment grew by 13.2% over the comparable period. A Reagan-type private sector payroll jobs gain would have produced an additional 6.6 million private sector jobs.
While the Current Establishment Survey (CES) that measures payroll employment tends to get more attention, the household survey that also measures employment provides some insight into the dismal nature of the current recovery. Adopting the same convention of counting off the cycle low that the White House uses when discussing private sector job creation in the CES leaves the Obama recovery dead last for employment gains among post-1960 recoveries.
Employment as measured by the household survey hit bottom in December 2009. In the 44 months since, employment has risen by 6.1 million or 4.5%.
Over the comparable 44 months, the average recovery saw employment rise at more than double that of the current recovery – 9.1%, equivalent to an employment gain of 12.5 million. That puts the employment gap of the current recovery compared to the average of other post-1960 recoveries at 6.4 million.
The analysis also looks at the manner in which declining labor force participation is making the unemployment rate a less reliable measure of the labor market’s health.
In contrast to the current labor force participation rate of 63.2%, in January 2009 the labor force participation rate was 2.5 percentage points higher at 65.7%. At the beginning of the recession, the rate was even higher, standing at 65.8%.
Absent the decline in labor force participation since January 2009, the unemployment rate would stand at 10.8% rather than the reported 7.3%, a 3.5 percentage point difference.
Both rates are significantly higher than the 5.0% rate that the Obama administration said the massive stimulus legislation passed in February 2009 would deliver.
While the headline unemployment rate is psychologically important and still widely followed, the dynamics of labor force participation make it increasingly less reliable as a meaningful measure of labor market health.
In the 50 months since the recession ended, real per capita disposable income has increased by only 3.2%. This is half the rate of increase in the second worst post-1960 recovery.
Real per capita disposable income increased an average of 11.4% over a comparable period in the other post-1960 recoveries. If real per capita disposable income had increased at that rate in this recovery, it would have grown by $4,074 (2009$) instead of only $1,144 (2009$).
Perhaps one of the most disturbing aspects of the “personal income story” is the wide divergence of how the public at large has fared compared to Wall Street. While real per capita disposable personal income advanced a paltry 3.2% since the recession ended, adjusted for inflation the S&P Total Return Index has soared by more than 80%.
While the Federal Reserve’s expansionist monetary policies may have helped to boost profits on Wall Street, it is increasingly clear that they have failed to deliver meaningful relief to families on Main Street. Economic policies that discourage investment and entrepreneurial risk taking on Main Street continue to deprive the American people of the economic recovery they need and deserve.
What about the sequester’s role in all of this?
Over the past year, there has been considerable discussion about the effects of automatic spending reductions contained in the Budget Control Act of 2011. Advocates for more spending predicted economic and social calamity if the sequester was not stopped. Some economic forecasters predicted that both real economic growth and employment would suffer if spending reductions were allowed to take place.
While the sequester has received the vast majority of “ink” in this discussion, the tax increase component of fiscal tightening should have received the bulk of the attention. In its June 2013 Economic Letter, the Federal Reserve Bank of San Francisco noted: “Surprisingly, despite all the attention federal spending cuts and sequestration have received, our calculations suggest they are not the main contributors to this projected drag. The excess fiscal drag on the horizon comes almost entirely from rising taxes.” (Emphasis added.)
An analysis of spending trends should be made in an appropriate context.
Nondefense spending was ramped up significantly during the recession and defense spending was boosted by the troop surge.
While all federal spending does not show up in the federal government consumption and investment (FGC&I) component of GDP, comparing current levels with pre-recession 4th-quarter GDP levels helps put some perspective on the question. Real GDP was 4.6% higher in the 2nd-quarter 2013 than its pre-recession level. Real FGC&I was an even greater 6.4% higher than the 4th-quarter 2007. Most telling, as Figure 12 illustrates, is the comparative levels of federal nondefense consumption and investment and defense consumption and investment.
In real terms, defense consumption and investment is 2.0% higher than pre-recession levels, while real nondefense consumption and investment is a whopping 14.5% higher.
Federal government spending remains elevated despite the protestations that “austerity” is hurting the economy. In reality, the only meaningful “austerity” that has been imposed is on American families via tax increases, not by reductions in federal spending. In reality, exceptionally low interest rates are masking the size of government spending on programs and entitlements.
See the entire staff commentary attached below in pdf format