Is the U.S. Economy in Recovery?

We are still a long way away from regaining footing in terms of "trend" macroeconomic activity and a lot can still happen in the meantime.

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Joseph Mason is the Moyse/LBA Chair of Banking at the Ourso School of Business at Louisiana State University and a senior fellow at the Wharton School of the University of Pennsylvania.

Minutes of the most recent Federal Reserve meetings released last week revealed a growing bias toward reducing or eliminating stimulus; yet, job numbers released the same week were all over the map. The market declined on the news. And as corporate earnings season begins, results are expected to be weak.

All this factors raise the question: Are we in recovery?

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In my view, yes. But recovery is not all that it is cracked up to be at this stage. While recovery has been much touted, rhetorically, all that it means is that we are turning the bottom and beginning to rebuild, even if haltingly, initially.

Recall the different "shaped" recessionary scenarios much vaunted during and after the June 2007-December 2009 recession. Bulls hoped for a V-shaped recession while bears threatened an L-shaped recession. In fact we have had a bit of a U-shape with a flat bottom, which is pretty typical.

Of course, the bottom of that U-shape is not really flat. A lot of bumping around happens down there as, for instance, unemployed workers try to find jobs (or, in the hysteresis hypothesis, decide whether to ever work again in the formal employment sectors), businesses re-allocate resources, and interest rate, foreign exchange rate, and regulatory policies settle in.

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Moreover, the National Bureau of Economic Research’s Business Cycle Dating Committee made the important caveat in their September 2010 announcement about the recession, pointing out:

In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month. A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion. [emphasis added]

So, you might say that the economy is just starting to turn up as we move from the flatter part of the U-shape to the initial rise at the right hand side of the bottom.

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But while there are whispers of recovery in some sectors, the economy remains susceptible to shocks from various outside sources, like sovereign debt (Greece may be recovering from their surgery, but Spain seems to be in line for similar struggles), oil prices, and, of course, more regulatory mayhem. Any of those influences could give rise to another significant economic shock and ensuing recession before the economy has fully recovered.

But that brings up another question: What is full recovery? One way to think of that concept is to imagine where the economy would be if we had not experienced the recession (and, to be fair, the real estate bubble). One can think of that concept in terms of real GDP or in terms of real GDP growth. My personal preference for monitoring such concepts is real GDP, as trend GDP growth does not mean we are yet at trend GDP (and in fact leaves some catch-up on the table).

While no one can predict the future, most projections suggest the U.S. economy will catch up with precrisis real GDP trend in about 2017-18. When you think about it, that is not far off from previous cycles, whether in terms of real GDP recovery from the U.S. Great Depression (1929-40) or industry recovery from the Thrift Crisis (roughly 1988-98).

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In summary, we are still a long way away from regaining footing in terms of "trend" macroeconomic activity and a lot can still happen in the meantime.

As baseball season begins again, I am reminded of a live television appearance in spring 2008 in which I and others were asked what "inning" the recovery was in. Others said at that time, roughly, the bottom of the seventh or top of the eighth. I took a lot of heat then for suggesting the top of the second, instead. Now, in 2012, I would say we are at the bottom of the seventh or top of the eighth. But the game is still close. We still have to play carefully so we don’t go into extra innings.