Economic Notes:The ‘70s Show Redux
3/29/2010
By Patrick O'Keefe, Director of Economic Research, J.H. Cohn
The Bureau of Economic Analysis has released its third (and final) calculation of the economy’s performance in the last quarter (Q-4) of 2009. It reports that Gross Domestic Product (GDP) grew 5.6%, notching its second consecutive quarterly gain and the largest in six years.
But that’s three months ago—ancient history in the era of insta-news. While its about-to-end successor (Q-1) is tomorrow’s (actually April 30’s) news, the relevant question is, “What should we expect going forward?” Here’s a first stab.
The recent pattern is somewhat reminiscent of the rebounds from downturns in the mid-1970s (1973-1975) and early-1980s (1981-1982), the most pronounced contractions in the post-war period prior to the recently concluded “great recession.”
But where the 1970s recovery was erratic and eventually gave way to stagflation, that of the 1980s was the beginning of the “great moderation” – a quarter century of steady growth interrupted by two short-and-shallow recessions.
In its early phase, the current recovery appears more akin to the mid-1970s, in that the rate of growth may already be slowing (i.e., growing, but in smaller increments).
Some down-shifting could be seen in the Chicago Fed’s National Activity Index (NAI), a composite of 85 economic indicators that declined in February.
Despite the monthly dip – only the second in a year – the index is higher than at any time since the end of 2007. In other words, the month-on-month change doesn’t suggest a U-turn but rather reflects some deceleration in manufacturing and construction, and consumer spending (e.g., car sales).
The February NAI reminds that, more than two years after the recession began, jobs remain scarce. Consequently, labor market weakness remains a drag on the U.S. economy as it simultaneously recovers from recession and rebalances how it spends and saves in the future.
In this context, the employment-to-population ratio (i.e., the proportion of working-age Americans with jobs), an important (but much ignored) indicator, may be behaving more like it did in the mid-1970s than in the 1980s.
In the mid-1970s, it took 47 months for the employment-to-population ratio (EPR) to return to its pre-recession level (58.2%); in the 1980s, it took 31 months to regain the pre-recession rate (59.1%). Today, 10 million new jobs are needed to return to the pre-recession EPR of 62.7% (December 2007).
Even under very optimistic assumptions (i.e., no additional population growth and average monthly gains of one-half million jobs), the economy’s jobs deficit looks to endure for another two years – longer than in the slow-growth decade of the 1970s.
Later this week, the Bureau of Labor Statistics will publish its jobs report for March. Most probably employment rose, perhaps briskly given the past year’s productivity boosts to corporate profitability.
So the outlook is for renewed, although uneven, job growth, to sustain an anemic recovery into the first half of next year – perhaps longer – in what’s shaping up to be a re-run of “That ‘70’s Show”.
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The statements, opinions, and conclusions contained herein are based solely upon the author’s own studies, research, and personal experience. Neither J.H. Cohn LLP nor the author makes any representation or warranty as to the accuracy or completeness of this information. J.H. Cohn LLP and the author expressly disclaim any liability for any loss or damage which may be incurred, of any kind whatsoever, as a result of or arising from the use of any of the information contained herein or reliance on the accuracy or completeness of it.