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Friday, August 3, 2012

It’s Still a Recovery in Name Only--A Real Tragedy

I have been regularly charting the path of real GDP and employment during the recovery from the recession as new data are released. From the start it was clear that the recovery was very weak. By its second anniversary the recovery was weak for long enough to call it “a recovery in name only, so weak as to be nonexistent.” Now we are just past the third anniversary, and it is still at best a recovery in name only. It’s now the worst in American history—a tragedy that should not be minimalized.

Here’s an update of the charts using the latest data through the second quarter or through July for monthly data. The first one shows real GDP in this recovery. You can see that the gap between real GDP and potential GDP (CBO estimates) is not closing at all. That is the main reason why unemployment remains so high.

Second is the comparison chart with the recovery from the previous deep recession in the early 1980s.That is a typical recovery from a deep recession. The gap closes.

Some say that recoveries from deep U.S. recessions--or from financial crises--are usually slower, but this is simply not true. Below are similar charts from the 1893-94 recession

and from the 1907 recession,

both associated with severe financial crises. You can see the sharp rebounds, nothing like the terrible recovery we have seen recently. This does not imply that the period after these recoveries was smooth; indeed a double dip followed the recovery in the early 1890s.

Of course potential GDP is difficult to measure so it is important to look at alternative charts. The next one used GDP growth rates. The average real GDP growth rate in this recovery has been only 2.2 percent, even lower than the 2.4 percent before the data were revised.

Finally, with today’s July employment numbers you can see the extraordinarily weak employment record in this recovery. The employment-to-population ratio is still lower than at the start of the so-called recovery. We now know that it fell in July as shown in the lower right part of the chart.