Let’s face it- the economic news has been worse than many hoped for. We’re having a slowdown in the economy just when we wanted the economy to be picking up. Many professionals are worried about a double dip and a jobless recovery. I’ve recently read some statements from people at the Fed and the Chief economist at Goldman Sachs regarding jobless recoveries and double dips that strike a useful cord in looking at where we are today.
Erica Groshen and Simon Potter from the Federal Reserve Bank of NY wrote:
“The current recovery has seen steady growth in output but no corresponding rise in employment. A look at layoff trends and industry job gains and losses in the last two years suggests that structural change—the permanent relocation of workers from some industries to others—may help explain the stalled growth in jobs.”
Goldman Sachs economists published a report called Double Dip that stated that they expect real GDP to turn negative late this year or early next year. They said that consumer spending is not likely to rebound quickly and that the rate of inventory accumulation we saw at the start of this recovery is clearly unsustainable without a significant increase in consumer demand.
The issue is that Groshen and Potter published their report in August of 2003 and Gary Wenglowski wrote Double Dip when I was a junior analyst at Goldman Sachs in October of 1974.
Obviously, even a great economist like Gary Wenglowski can be wrong; no double dip occurred. The NY FED researchers were wrong too, no recession took place in 2004. Double dips and jobless recoveries are prognosticated a lot more than they happen. In fact, jobless recoveries haven’t ever occurred and a double dip only occurred once when it was engineered by Paul Volker and the Reagan administration arm in arm.
Some really interesting data shows that recoveries very often slow down--a lot-- during the first or second year of recovery only then to accelerate to higher levels of growth the next year. This clearly happened in 1982, 1976, 1991 and 2002. That’s right, you’ve got it- IT’S HAPPENED IN EVERY BUSINESS CYCLE RECOVERY WE’VE HAD OVER THE LAST 35 YEARS. When the downturn in growth comes, no one is smart enough to know whether it’s leading to a double dip, but in each of those cases it did not. Only following the 1980 recovery did the slowdown turn into a double dip. The aforementioned strategy of the Fed dramatically inverting the yield curve and raising borrowing rates to a large real burden for borrowers did the job. Again this was done on purpose to accomplish a goal of destroying inflation expectations. Even the double dip probably would have fallen short of killing off inflation expectations if it had not been coupled with Reagan’s calculated termination of the air traffic controllers that came later.
The business cycles that began in 1991 and 2001 both replaced workers considerably more slowly than the other post-War cycles. Two Kansas City Federal Reserve bank economists, Stacey Schreft and Aarti Singh analyzed this in a paper published in the fourth quarter of 2005.[i] They hypothesized with reasonable evidence that jobs come back slower because of “just in time” labor practices. These include using temporary workers and part time workers before rehiring full time workers. They believe that another hypothesis they call the Wait-And-See hypothesis explains why jobs come back slower. They point out that before the development of a strong temporary employment infrastructure it was very costly for companies to miss the recovery by not having enough productive capacity to meet growing demand. Now, however, there is a strong infrastructure for “just in time” hiring. This capacity happened, in part, because of advances in telecommunications and technology for working remotely. This was coupled with the evolution of an industry meant to supply “just in time” workers when needed to business. Now, many employers choose to wait and see if demand comes back before they permanently rehire. This trend has been exacerbated due to more expensive health care costs that make it more costly to rehire permanent workers and the lack of union power to impose restrictions on temps.
This all makes sense, but a few points should be made:
1. Temporary workers and part time workers earn money and can create bridge demand.
2. Eventually permanent workers are hired back; it’s just with a lag.
3. If an ever larger part of the workforce chooses to telecommute and be part-time or temporary workers on an ongoing basis, our labor counting systems don’t account for this well.
If recoveries take longer it’s worth noting that they still happen. In addition, it’s very normal that the speed of recovery slows down a lot sometime between the first and second year and then reaccelerates. This leads me to focus on the probability that things will be looking a lot better when data is reported late this fall. In addition, the populist message that a vast majority of the country wants the government to live within its means will likely be delivered at the polls. Regardless of how many seats are won or lost by Republicans or Democrats, there is an excellent chance that the Congress that is seated will be less inclined to grow government to solve problems and more inclined to incent the private sector to do so. All in all, the prominent worries of this summer may be a fleeting memory by year-end.
[i] Stacey L Schrft, Aarti Singh and Ashley Hodgson, Jobless Recoveies and the Wait and See Hypothesis, The Federal Reserve Bank of Kansas Economic Review. Fourth Quarter 2005.
Fred S. Fraenkel Vice Chairman andChairman of Investment Policy Beacon Trust Company
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