This Downturn Is Different
The Debate Room (BusinessWeek), July 31, 2009
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Have we dodged another Great Depression? For sure. Are we out of the woods? Not by a long shot.
The best we can say at this point is that the economy is getting worse more slowly than it was before. Real gross domestic product fell at a 6.3% annual rate in the last quarter of 2008; it was falling at a 5.5% rate in the first quarter of this year, and, if forecasts prove correct, it will decline only 1% to 2% in the second quarter. So the economy may start to grow again soon, but the expansion will likely be anemic, with a real risk of a “double dip” recession—that is, recession followed by a modest short-term improvement that quickly lapses into recession again.
What is missing is any plausible source of economic demand. After 2001, the housing bubble fueled consumer spending, construction, and growth. This time around, consumers, anxious to rebuild their balance sheets, are poorly placed to take the lead.
The federal stimulus package fell far short of plugging the projected output gap, and fresh cuts at the state and local level will neutralize much of the package. With the rest of the world following us into a deep recession, the prospects for export-led growth also appear dim.
The biggest problem, though, remains the labor market, where unemployment will quickly top 10%. Even if the official recession ends this year, the last two recessions and their "jobless recoveries" suggest it will be two to three more years before the labor market begins to tighten again.
John Schmitt is a Senior Economist at the Center for Economic and Policy Research (CEPR). He has worked as a consultant for national and international organizations including the American Center for International Labor Solidarity, the Global Policy Network, the International Labor Organization, the United Nations Economic Commission for Latin America.