Whether or not an economy is in a recession is something of a technical question. Some economists insist that the country needs negative GDP growth for two consecutive quarters; otherwise, it is just a soft spot. Some economists use complicated formulas including business investment, unemployment, and other factors to determine whether the recession is real. For the average person on the street, a recession is like pornography; you just know it when you see it.
Judging by the third metric, the U.S. economy has probably stalled out and returned to a recessionary state in the last two to four months. Industrial production, consumer spending, business confidence, hiring, overall demand—look at any of those metrics from the spring and summer, and find a sick economy getting sicker.
In the last two days, we have gotten two new, big numbers to confirm that old recessionary feeling. This morning, the Department of Labor announced the July unemployment and jobs-growth figures. Whether you think they are terrible depends on whether you are looking at levels or trends. The unemployment rate fell—good news! But it fell from 9.2 percent to 9.1 percent—bad news. The economy added 117,000 jobs—a decent number! But that is not enough to keep up with population growth, alas. At the pace of jobs growth seen in the 2002-07 expansion, we will not return to a normal rate of unemployment, 5 percent, for the better part of the decade. At the current pace of jobs growth, we will never return to a normal rate.
Second, the bottom fell out of the markets yesterday. The debt-slashing/debt-ceiling deal that snuck through Congress at the last minute did not manage to calm investors' fears about everything else going horribly in the economy—stalled-out U.S. growth, the possible failure of the euro project, the sovereign debt crises in numerous European countries, slowing growth in Asia. Over the course of the last eight days, the Dow Jones has given up all the gains made since the beginning of the year. Yesterday alone, it shed 512.76 points, more than it has in a single day since 2008.
Granted, it's unwise to read too much into the stock market's movements. (The Dow has already started to bounce back up.) Sure, the dipping stock prices have something to do with the sick economy, in the broad sense that it has become increasingly difficult to tell yourself a story in which growth will be robust. But saying why markets moved on any particular day is almost always a fool's game.
Better to focus on the more-solid numbers in the Department of Labor report. This month's headline numbers might be OK. The underlying numbers are not. The employment-population ratio, the broadest measure of how well we are utilizing our human capital, is at its lowest level in 25 years. Workers continue to drop out the labor force, because the economy is so crummy. (Indeed, the reason the unemployment rate dropped is because so many workers decided to stop looking for work.) Plus, the numbers come on the back of last week's Department of Commerce report showing that GDP grew at a pace of less than 1 percent per year in the first two quarters. That's about a third as fast as it should be growing, were we in a normal expansion.
So what gives? Are we in a recession? In some sense, it doesn't matter. It feels like we are in one, with individuals and businesses continuing to hunker down and withhold spending and investment. The long, slow slog of deleveraging—reducing debt and upping savings, economy-wide—continues to pain businesses and individuals.
What is really worrisome is that if we are in a contraction, we have lost some of our best tools to get out of it. Normally, to help jolt an economy from recession, Washington uses a combination of fiscal policy and monetary policy. During the last recession, which officially lasted from 2007 to 2009, Congress approved a $787 billion stimulus package, which included big spending programs and tax cuts targeted at returning money to families and encouraging businesses to add workers. The monetary policy pushback included dropping interest rates close to zero and the Federal Reserve engaging in two huge rounds of bond buying, swelling its books by more than $2 trillion.
This time around, fiscal policy is, for the most part, off the table, something confirmed to me yesterday by House Minority Leader Nancy Pelosi. The only measures that will pass Congress are ones that require minimal or no government spending. She mentioned some tax credits to incentivize businesses to hire workers, infrastructure investment, and policies to encourage China to let its currency rise against the dollar. Those measures would help, but probably only around the margins.
As for monetary policy: The Fed answers to nobody but itself, and it still has some tricks up its sleeve. The markets are eagerly anticipating the third round of quantitative easing. The Fed could also engage in targeting, where it names, for instance, a rate of inflation it considers healthy and promises to engage in loose-money policies until it gets there. It could also stop paying interest on certain reserves.
But both the fiscal and monetary policy toolboxes have lost their best hammers and nails since the last time around. The best we can hope for is an athletic Fed response, along with targeted, leveraged programs from Congress that might help to counter shrinking government spending across the board. Take infrastructure investment. Right now, the unemployment rate in the construction sector is around 20 percent. The world's investors are charging the United States just 2.47 percent to borrow for 10 years—less than at any time since the 1950s. The country would be crazy not to fix its bridges and repair its roads for those costs now, rather than doing so later, when labor and financing will be more expensive. It won't necessarily get us out of the recession that we might be in. But it sure would help.
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