Our economic milestones aren't very impressive these days.
It felt like cause for minor celebration recently when the nation's gross domestic product finally surpassed the level it was at the before the recession. At last! Now that we've dug ourselves out a big hole, maybe things will start to return to normal, right?
Sorry, but no. The headline GDP number is belated good news, but it also obscures how deeply damaged the economy really is. Real GDP, adjusted for inflation, last peaked in the second quarter of 2008, shortly after the recession officially began. Output fell for the next four quarters, for a total decline of about 5 percent--a very large contraction for an economy such as ours. GDP started growing again in the middle of 2009, and since then it's risen by about 5.6 percent, putting total output slightly above the 2008 high.
Since 2008, however, the U.S. population has grown by about 6.5 million people. And GDP per capita—which measures economic gains spread across the whole population--is still about 3.1 percent below the pre-recession peak. By that measure, the economy is still at 2005 levels. Over the last year, in fact, GDP per capita has barely inched up, which means the economy is growing just a fraction faster than the nation's population. "GDP per capita is not back to normal," says Justin Wolfers, an economics professor at the University of Pennsylvania's Wharton School of Business. "The hole is so deep that we have to get used to the idea that we're going to be in the hole for a long time."
Many other indicators look bleak when measured against a growing population and adjusted for inflation. Disposable income—the amount left over after taxes are taken out—peaked on a per-capita basis in 2008, at the same time GDP per capita peaked. Disposable income fell through the end of 2009, for a total decline of about 6 percent. But incomes during that time were propped up by a variety of temporary tax cuts, extended unemployment benefits and other government stimulus measures. So underlying income fell by considerably more than GDP, when measuring both on a per capita basis.
After bottoming out at the end of 2009, disposable income drifted up for a while, then dipped again in the third quarter of 2011. Overall, it's still about 4 percent below the 2008 peak, which puts it at 2006 levels. Even if GDP keeps rising, income could fall further, as the stimulus spending from 2009 runs out, certain tax cuts expire and the government cuts back on unemployment benefits.
Since income determines spending, that's down too, on a per-capita basis. The latest numbers on consumer spending show a slight improvement so far this year, but overall, spending is still 1.7 percent below the peak from the end of 2007. And back then, consumers had a much easier time borrowing to finance consumption. Today, fewer people are able (or willing) to rack up credit-card debt, and there's precious little home equity to borrow against. Plus, many people need to save more, to rebuild battered retirement plans or offset losses in the value of their homes. So spending seems likely to stay subdued for as long as incomes stay depressed, and maybe longer.
The most tangible sign of our hollow economic growth is the shortage of jobs. The economy has regained its peak output with about 6.4 million fewer jobs than there were in 2008. If the economy had continued to create jobs at its prior pace instead of plunging into recession, we'd have about 12 million more jobs right now. That's an enormous deficit that could transform American society in ways we still can't foresee. The percentage of adults who are working or looking for work, for example, has plunged over the last two years, and is now back to the same level as in the early 1980s, before large numbers of women stormed into the workforce. Such a stark change in the labor force, if it lasts, could permanently alter the way families earn and spend, while also straining the nation's social and economic safety nets.
These distressing subtrends explain why many Americans are still experiencing a recession, even though the economy is growing. In sum: While the nation's economic output has eclipsed its prior peak, GPD, income, spending, and employment are still far below prior peaks when measured across the whole population. With growth in jobs and GDP as weak as it is, those measures could remain depressed for years.
There's not much modern precedent for the whole phenomenon, so economists are grasping at new ways to describe what's going on. Some call the current situation a "growth recession," to emphasize that many aspects of the economy remain recessionary, even if the traditional definition of a shrinking economy doesn't apply. With income and spending depressed—and likely to stay that way--the U.S. economy seems to be transitioning from one dependent on consumer spending to one in which business spending becomes more prominent.
Like other economists, Wolfers foresees a "lost decade" in which the current problems persist and there's no government policy or free-market dynamic that produces a sudden turnaround. If there's any good news, it's that the current downturn may have begun as early as 2006, according to some secondary measures, which would mean we're halfway through the ordeal. So maybe we'll hit a true milestone in 2016. That leaves plenty of time to plan the celebration.