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What's Wrong with the Recovery?
What's wrong with the recovery? It's been almost two years since the end of the Great Recession in July 2009. The recession ended in the sense that the economy stopped declining and started growing. But growth has been very slow.
Funny thing, the last time we had a "Great Recession," in 1981-82, the recovery was fast. Maybe if we compare the two recoveries, we can figure out what went right back then and what is wrong now.
Our recession hit bottom in July 2009, 23 months ago. The 1981-82 recession hit bottom in November 1982. Add 23 months to that date and you get October 1984. Those are the months that we'll compare.
Now the unemployment rate is 9.1 percent, down from a high of 10.1 percent. In October 1984 the unemployment rate was 7.4 percent, down from 10.8 percent at its worst. Unemployment was falling a lot faster back then.
The odd thing is, industrial production has risen at nearly the same rate now as it did then. It seems that industry is increasing output without hiring many new employees. Instead, investment in software and equipment is rising almost as fast now as in 1984. Perhaps businesses are taking the opportunity to invest in more productive equipment. Output rises but employment doesn't.
One thing businesses aren't doing now is building houses. Housing construction is still near record lows, with no recovery since mid 2009. Housing starts were up 16 percent at this point in the recovery in 1984. Today, there's a glut of houses for sale, left over from the housing boom of the 2000s. This depresses new construction and reduces home prices.
Last time oil prices were falling. This time they are rising.
Fewer jobs, falling home prices, rising gas prices: all this makes consumers gloomy. Consumer sentiment is up just 5 percent since 2009. In 1984 it was up by more than 30 percent two years into the recovery. Gloomy consumers don't spend. Consumer spending was up 9 percent after two years last time; it's up only 3 percent this time.
Federal spending on social benefits is rising faster now, partly due to Social Security and Medicare and partly because unemployment is still high. Federal non-defense spending grew faster this time, partly because of stimulus programs. Oddly, though, federal defense spending was rising faster in 1984, as the defense buildup got started. It hasn't changed much in this expansion, despite two or three wars. But this time, state and local government spending is declining, enough to just about cancel out the rise in federal spending.
We've got one advantage over ourselves back then. Then, the exchange value of the dollar was rising and exports were falling. Now the value of the dollar is up and down, and exports are rising. Part of the difference is interest rates. Last time interest rates were high, and the world demanded dollars to lend in the United States. That increased the dollar's value, which made our exports more expensive. That's not happening this time. Perhaps exports will help get this recovery going.
Last time the recession got started when the Federal Reserve jacked up interest rates to choke off borrowing and spending, in order to bring down double-digit inflation. It worked. Inflation dropped. Then the Fed eased off. Interest rates fell some and the recovery began.
This time the collapse of the housing boom kicked off the recession, and the Fed cut interest rates trying to stop it from becoming a depression. You can raise interest rates as high as needed to restrain spending - the mortgage rate topped 18 percent in late 1981. But interest rates can only go so low - zero, in the case of the federal funds interest rate that the Fed controls. Maybe zero isn't low enough for banks and borrowers to get past their gloom.
So, what's wrong with our recovery? A glut of housing. Business expansion without hiring. Rising oil prices. Downsizing of state and local governments. Gloomy consumers. But maybe most important, last time the Fed held the economy back, and when it let go the recovery took off. This time the recession came from a financial crisis. The Fed has tried to encourage more lending and spending. But banks and businesses and consumers just aren't buying.