There is a fundamental point that I have made in nearly all of my economic writings over the last year. Because that point is frequently missed, as it has not been the focal point of my commentary, I wanted to place it front and center in this diary.
Both Bonddad and I called the recession before it began. And both of us said it looked like the economy was bottoming a couple of months before it did. I went beyond that and spent a great deal of effort trying to determine when the jobs situation would turn around. Last September I said the bottom would be in November or December +/- one month -- an effort that turned out to be exactly correct. While others were -- wrongly -- mired in bearishness that was contradicted by almost all of the objective data around them, Bonddad and I chronicled the turnaround that has continued to the present.
What neither of us has said is that wage, income, employment or the unemployment rate, are anywhere near "good." Neither on of us is saying that "Happy Days are Here Again." In fact, Happy Days Aren't Here Again.
One of the frequent types of criticisms that Bonddad and I received last year after we said the economy was bottoming, was on the order of "It's not a recovery until jobs start to be added," or "It's not a recovery until unemployment starts to go down."
Well, we now know that the economy has been adding jobs since the beginning of this year -- 600,000 if you use the more common "establishment survey" which asks employers if they have been hiring or firing, and 1.6 million if you go by the less commonly reported "household survey" which asks consumers if they have been working during the last month. As of now, it still looks like last October was the peak for both the U3 and U6 calculations of the unemployment rate.
Yet we still receive complaints like "But you said the Recession was over, didn't you? The Recession is nowhere near over. Not with 10% unemployment." Criticisms like these highlight a fundamental disconnect between economic terms and common discourse.
While we both called for the reversal of the direction of the economy as a whole, and jobs in particular -- in other words the downward trend towards the abyss last spring reversed and became the continually improving upward trend that has continued until now -- niether one of us has said that the absolute level of economic activity, be it of household income, or jobs, or unemployment, or wages, are "good."
Thus while in economic terms the "Great Recession" ended late last year, I would agree with an amendment to the above criticism, that "The Hard Times are nowhere near over."
The problem arises from differing terms of frames of reference. For example, here is one good description of the business cycle:
In outline, the economic cycle is divided into 4 phases: (1) slowdown or a slowing economy, (2) recession, (3) [ ] improvement of the economic recovery and (4) expansion of the economic boom.
In the most straightforward economic sense, a recession is a period of declining economic activity. A recovery is a period of rising economic activity, that has not yet regained the peak GDP level before the recession. An economic expansion begins once the economy is expanding at a level that exceeds its highest GDP from before the recession.
Thus in simple terms, we had a recession until sometime last summer. We are currently in a recovery because economic activity is expanding. We are not yet in an expansion because that positive economic activity as not yet exceeded its 2007 peak. Here's the relevant graph of real GDP that plainly makes that point:
But there is a disconnect between the language of economic cycles and the language of Main Street distress in a time like this. In most weak recessions, unemployment and wages might both pick up again shortly after the bottom of economic activity, and we might return to a level of at least nearly full employment within a year or two, as for example, in the a classic post-WW2 recession like 1960:
But after a severe recession, like the one that ended last summer, it can take literally years before economic conditions return to levels that are not full of distress. Thus, take for example this graph of GDP during the 1930s:
A business cycle economist might say that the Great Depression bottomed in 1933 and that thereafter until 1938, the economy was in recovery. But we call the entire 1930s "the Great Depression" because unemployment never dipped below 10%.
Similarly, in between 1974 and 1986 -- a period of over 10 years -- there was almost no period of time during which employment was anywhere near full (typically figured to be under 6% unemployment), even though there were recoveries and expansions after each of those recessions:
Since the year 2000 economic performance as a whole has been so poor that at no point has median household income of Americans ever exceeded the level attained in 1999:
One decade has already been lost, and it appears that another lost decade may be beginning, with no end to the structural problems of wage stagnation in sight. Now, like the 1930s and 1970s, the economy is growing again -- it is in recovery -- and thankfully since the beginning of this year jobs are being added, but unemployment remains intolerably high at nearly 10% in U3 terms:
Thus a year ago, when there was derision for the concept of "green shoots", and people spoke scornfully of the "second derivative", i.e., the downtrend was just slowing down, it was correct to highlight the fact that the Leading Indicators pointed to a change in the direction of the trend itself (i.e., the "the first derivative"). What has not happened, and most likely will not happen anytime soon, is that the upward trend will reach the absolute level where income, wages, or employment are sufficient for the long-term economic well-being for average Americans.
Last year when it seemed nearly everyone thought we were falling into the bottomless abyss of Great Depression 2, it was not just valuable or correct, but vital to point out that conditions were bottoming and a change in direction was upon us. That being said, "Happy Days are not here again," and nothing I have written should be taken to mean that I say they are. Hard Times are still here, and probably will be for a substantial time to come. Until there is sustained real wage growth for average Americans, it will be difficult for America to have sustained economic growth.
UPDATE: There has been some discussion in the comments about whether GDP is a worthwhile metric in term of the average American's well-being. As shown in this graph, year-over-year GDP growth (blue) (minus~2%) is an excellent predictor of year-over-year job growth (red):
Obviously it cannot tell you about the quality of the jobs. But as between jobs growth vs. loss, there's no contest.