FRBC: Normal Recovery, Elevated Unemployment Levels

I want to bring two pieces of Federal Reserve Bank of Cleveland research to your attention this weekend. These are almost-not-quite-contradictory papers, in that the headlines appear opposed to each other. As so often is the case, the reality is more nuanced.

The first piece, Not Your Father’s Recovery?, challenges the conventional assumptions that the current recovery is aberrational and disappointing. Using real GDP growth, unemployment, inflation, and the federal funds rate suggests to this Cleveland Fed researcher that the recovery looks consistent with past recoveries — if we use just the data from 1983 onward:

“If all goes according to the usual business-cycle dating procedures, a committee at the National Bureau of Economic Research (NBER) will soon convene to declare that what has come to be known as the “Great Recession” came to an end in June 2009. As we all know, it was a doosie. Beginning in December of 2007, it will have lasted 19 months—the longest downturn since the Great Depression. It will also go down as the deepest as the United States shed 4.1 percent of gross domestic product (GDP) from peak to trough. The unemployment rate more than doubled, rising from 5.0 percent in December 2007 to a peak of 10.1 percent in October 2009.

Now that we are a year into the recovery, and the annual July “benchmark” revisions to the National Income and Product Accounts are complete, the time is ripe for an assessment of the recovery so far. Popular opinion strongly suggests that it has been “substandard.” But what is the standard by which the strength of a recovery can be measured? Some point to a historical tendency for deep recessions to be followed by rapid recoveries and vice versa . . .

There has been much talk about a disappointing recovery in the wake of the Great Recession—that this time it is much slower . . . Real GDP growth is not so different than we might have reasonably expected a year ago. The relationship between output growth and the unemployment rate looks somewhat anomalous, with an unemployment rate remaining higher than history alone would suggest, but not resoundingly so. Core PCE inflation turned out roughly as anticipated over the previous year, as has the Federal Reserve policy of a near-zero federal funds rate.”

The charts here show the impact of only using modern data.

The second research piece looks at employment, and surmises that post crash/post crisis, the “natural rate of unemployment” is now higher, but not nearly as much as many economists have surmised:

“The past recession has hit the labor market especially hard, and economists are wondering whether some fundamentals of the market have changed because of that blow. Many are suggesting that the natural rate of long-term unemployment  — the level of unemployment an economy can’t go below — has shifted permanently higher. We use a new measure that is based on the rates at which workers are finding and losing jobs and which provides a more accurate assessment of the natural rate. We find that the natural rate of unemployment has indeed shifted higher — but much less so than has been suggested. Surprising trends in both the job-finding and job-separation rates explain much about the current state of the unemployment rate.”

Interesting food for thought . . .


Not Your Father’s Recovery?
Kenneth R. Beauchemin
Federal Reserve Bank of Cleveland, 09.09.10

Unemployment after the Recession: A New Natural Rate?
Murat Tasci and Saeed Zaman
Federal Reserve Bank of Cleveland, 09.08.10

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