The Return of the Double-Dip Crowd
There can be little doubt that the United States is experiencing a slow and halting recovery from the severe downturn of 2008-2009. The economy is still down almost 10 million jobs from its trend level. With an underlying rate of labor force growth of 100,000 a month, even if the economy were to add 200,000 jobs a month on a consistent basis it would take us almost to the end of the decade to get back to full employment.
We would get the same story looking at output. The Congressional Budget Office estimates that the economy is roughly 6.0 percent below its potential GDP. It put potential GDP growth at around 2.4 percent annually. This implies that if the economy maintained a 3.0 percent growth rate it would take us a full decade to get back to potential.
These are the fundamentals of the U.S. economy at present. Even at what is not considered a healthy growth rate we would needlessly be condemning millions of people to long periods of unemployment. The long stretches of unemployment implied by their growth path would likely to be devastating to the lives of millions of workers and their families.
Unfortunately there is very little discussion of this longer term path because the media and Washington policy wonks can’t take their eyes off the latest economic data, which they almost invariably misinterpret. Last winter the problem was that unusually good weather led to better than trend numbers for jobs, retail sales and home sales. This led many analysts to become ecstatic about the growth rebound.
At the moment, the obsession is in the other direction. The better-than-trend growth in the winter is being offset by worse than trend growth in the spring. We had three consecutive months (April, May and June) of weak job growth. Just this week the Commerce Department reported that retail sales dropped for the third consecutive month.
This latter figure prompted some to run to the history books to discover that three consecutive months of declining retail sales has almost always been a harbinger of recession. That was sufficient to bring many of the double-dip recession crew out of the closet to again warn us that the economy faces a second downturn.
Before anyone gets too concerned about the drop in sales over the last three months leading to a recession it is worth considering that sales rose at an 8.5 percent annual rate over the prior three months. Retail sales are still up by almost 5 percent from their year-ago level, which hardly looks like the basis for a recession.
Furthermore, other sectors of the economy, most notably housing, are doing quite well. The Commerce Department’s data on housing starts for June showed the housing monthly rate since just after the collapse of Lehman in the fall of 2008. Other data from the housing sector is also positive with all the price indices showing that prices are now on the upswing.
Similarly manufacturing appears to be returning to its growth path. Data from the Federal Reserve Board showed a strong 0.7 percent rise in output in June. This is consistent with strong numbers from the Commerce Department for investment goods orders. The number of people filing for unemployment insurance in recent weeks is also consistent with a modest pace of hiring.
In short, there is a wide range of economic data that suggests that the economy is still growing, most likely at a pace near its trend growth path of 2.5 percent. This is hardly anything to celebrate, but it certainly is not a recession.
Unfortunately because so much pessimism has permeated economic reporting in the last few months, the realization that the economy is still growing at a modest rate will likely be seen as grounds to celebrate, just as was the case when the economy picked up steam in the fall of last year. It may be a pointless quest, but it would certainly be a positive development if reporters could learn to be a bit more responsible in their reporting.
There are a few basic points that should not be hard to follow. First, it is important to recognize that data releases are erratic. There are always large random factors that can influence a single release that cause it understate or overstate the change in whatever it is measuring. This makes it desirable to put any specific release in the context of prior releases of the same report and all the other data reports that are available at the same time.
The second factor to remember is that weather does matter. Seasonal adjustment factors take account of normal fluctuations in the weather. They do not incorporate the effects of extraordinary events like a severe hurricane or mild winter.
Finally, track records should matter. If an economist is constantly saying that the world is going to end then presenting their assessment that the world is about to end is probably not a good use of space in a news report. Reporters should try to find sources who at least occasionally are right in their prognostications.
Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.