Saturday, November 21, 2009

What A Real Recovery Looks Like

The latest U.S. recovery has been a really strange on. Except for stock prices and the headline GDP and industrial production numbers, almost no numbers have indicated recovery. Real wages, employment, real disposable income, tax revenues and (probably, first numbers for that are released next week) real national income are all falling.

It would be instructive then to outline what a real recovery would look like. The 1983-84 recovery provides a real good example. Like the current recovery it was preceded by a deep recession, but the recovery had a very different character. Between the fourth quarter of 1982 and the fourth quarter of 1984 we saw the following:

The GDP volume rose by 13.7% (6.6% at an annual rate)
terms of trade adjusted GDP rose by 14.5% (7% at an annual rate and real disposable income excluding transfer payments rose by 12.5% (6.1% at an annual rate).

Real national income rose by 16.2% (7.8% at an annual rate) reflecting a gain in real corporate profits by 49.3% (22.2% at annual rate), and an increase real labor income (aka "compensation of employees") by 11.6% (5.7% at an annual rate)

The latest number reflected both an increase in the number of jobs by 7.3 million or 8.3% (which given the size of the current labor force would be more than 10 million new jobs in just 2 years) and an increase in real average weekly earnings by 2.6%. Note that almost all of these new jobs were in the private sector and that private sector employment rose as much as 10% in 2 years. As result, the unemployment rate dropped from 10.8% in December 1982 to 7.3% in December 1984 despite a significant increase in the size of the labor force.

And despite the fact that there were net tax cuts, real federal tax revenues rose by 5.9%.

(As a technical note, I deflated all the above numbers except volume GDP and of course the employment and unemployment numbers with the gross domestic purchases deflator to make the real numbers comparable)

Now that's a real recovery. Before we can start talking about a recovery worth mentioning we should see numbers which are, if not quite as strong as during the extremely robust 1983-84 boom (matching that is pretty tough), but at least as consistently showing positive growth.