Our brief encounter with optimism is now well and truly over. We have had the greatest fiscal and monetary stimulus in modern times. We have had a whole series of programs to pay people to buy cars, purchase homes, pay off their mortgages, weatherize their homes, and install solar paneling on their roofs. Yet the recovery remains feeble. We are at least 2.5 million jobs short of getting back to an unemployment rate of under 8 percent promised by the Obama administration. Concern grows that we are looking at a double-dip recession and hovering near the brink of a destructive deflation. In short, this is news bad enough for Federal Reserve Chairman Ben Bernanke to take the unusual step of characterizing the economic outlook as "unusually uncertain."
Are we at the end of the post-World War II period of growth? We've shoveled in tons of money to rescue reckless banks and fill the huge hole in the economy, but nothing works as it did in previous crises. Rather, we are in what many economists call "the new normal." This is a much slower-growing economy that is causing Americans to let go of the long-held assumption that their children will have it better than they.
What was thought to be normal in the context of post-World War II recoveries? One assumption is that four quarters into the recovery, real gross domestic product would expand at an annual rate of over 6 percent. Instead we are coming out of the current recession at a growth rate of 2.4 percent. In other words, more than two years after the beginning of every post-war recession, we would now usually be at a new peak of economic activity. In this recession, economic activity in real terms is still 1 percent below the pre-recession peak.
We did enjoy a GDP boost from a buildup of inventories anticipating a recovery at normal speed, but it didn't happen. Economist David Rosenberg regards it as "frightening" that, whereas the "normal" rate of increase in final sales is 4 percent annually, this time sales have averaged only 1.2 percent, the weakest revival in recorded history. In short, we can't expect the GDP to grow much more from stockpiling.
The prospect for jobs is dim, too. At this point after the onset of a recession, employment payrolls typically exceed 700,000 jobs above the previous peak. In this recession, we are still down roughly 8 million jobs from the December 2007 peak. As for consumer confidence, the Conference Board survey shows an average of a full 20 points below the average lows of previous recessions.
There seems to be a structural change in the American economy. The relationship of household debt to income has proven unsustainable. The ratio is normally established somewhere below 100 percent, but in 2007 the debt ratio hit 131 percent of income. It has now fallen to 122 percent, but at this pace of pay-down, it would take another five years to bring it under 100 percent. In the meantime, we may well be looking at a vicious cycle of defaults that in turn would produce credit tightening and still more economic weakness, compounding the caution among borrowers, lenders, and public financial authorities.
The most obvious source of distress is the lack of payroll growth, and it is likely to get worse. Real unemployment today is well above the headline number of 9.5 percent. That number held steady only because 1.2 million people gave up hope of finding work and left the labor force in the last three months. Otherwise, the headline unemployment rate would have been around 10.4 percent. Now there are at least 14.5 million Americans still searching for work: 1.4 million of them have been jobless for more than 99 weeks, and 6.6 million have been jobless for over 27 weeks—a stunning reflection of the longer-term unemployment we are coping with.
The unemployment numbers are worse than reported. Last year the Labor Department admitted it overcounted the number of jobs by 1.4 million. Why? Because they used a computer program that tries to extrapolate how many new companies are being created during each month and then guesstimates the number of jobs these firms should be creating. They were wrong. Since April, the Labor Department counted 550,000 nonexistent jobs under this so-called birth/death series. In this economy, where there is virtually no financing for startup companies, it is doubtful whether many of the new companies or the new jobs even existed. Without these phantom jobs, the economy this year created virtually no jobs, certainly not the 600,000 that the administration has been touting.