Deep Recessions in U.S. May Be the Norm, Say NBER Economists
Deeper recessions and more gradual recoveries will be the norm rather than the exception as the U.S. workforce grows at a slower pace, according to economists on the panel that determines when slumps begin and end.
The typical contraction “will have steeper declines and slower recoveries in output and employment,” according to a paper by Harvard University’s James Stock and Princeton University’s Mark Watson presented today at the Brookings Panel on Economic Activity in Washington. “We can expect recoveries from future recessions to be ‘jobless’ as well,” they said, similar to the two most recent rebounds.
The economists, who are members of the National Bureau of Economic Research’s business cycle dating committee, found the severity, length and aftermath of the 18-month slump that ended in June 2009 were predictable based on comparisons with past downturns. The conclusion stands in contrast to a 2009 study by Carmen M. Reinhart and Kenneth Rogoff that showed recoveries from recessions caused by financial meltdowns are different.
Stock and Watson’s research shows the “recession was the result of one or more large shocks, that these shocks were simply larger versions of ones that had been seen before, and that the response of macro variables to these shocks was almost entirely in line with historical experience,” they wrote. Stock and Watson joined the NBER’s committee in September 2009.
The authors identified six shocks that, to varying degrees, can explain the behavior of recessions, including the 2007-2009 slump. Studying changes in oil prices, monetary policy, productivity, uncertainty, liquidity-financial risk and fiscal policy are enough to draw conclusions about the eventual outcomes, they said.
The analysis of the last downturn “suggests an economy being hit in close succession by a sequence of unusually large shocks, all of which have been experienced before, but not in such magnitude or close succession,” Stock and Watson said. It was triggered by “an initial oil shock, followed by the financial crisis, financial market disruptions, and prolonged uncertainty due in part to policy uncertainty.”
While the anemic nature of the most recent recovery may indicate that this time is different, the shortfall is more a function of long-run changes in the structure of the economy, not a result of the recession, the economists said.
Employment Gains Smaller
In the first eight quarters of the rebound that began in June 2009, the world’s largest economy grew 5 percent, compared with an average 9.2 percent gain for the seven recessions from 1960 to 2001, they said. Employment increased 0.6 percent, short of the 4 percent increase seen in the prior recoveries.
Changes in the so-called long-run trend, or fundamental structure, of the economy, rather than the harm caused by the collapse in growth, account for almost all the shortfall in gross domestic product and more than half the slowdown in employment, according to Stock and Watson, based on comparisons with the pre-1984 averages. The authors made comparisons to earlier recessions in this case to isolate the influence of the structural changes.
The decrease in the trend, in turn, is almost entirely explained by declining population and employment growth rates, they said. One reason is a slowdown in the number of women entering the workforce, they said.
“Barring a new increase in female labor force participation or a significant increase in the growth rate of the population, these demographic factors point towards a further decline in trend growth for employment and hours in the coming decades,” Stock and Watson said. That is why future recoveries will continue to be “jobless,” they said.
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