Twilight Zone Economics
By Paul Krugman
New York Times
Friday 15 August 2003
For about 20 months the U.S. economy has been operating in a twilight zone: growing too fast to meet the classic definition of a recession, but too slowly to meet the usual criteria for economic recovery. There's nothing particularly mysterious about our situation. But recent news coverage and commentary - in particular, the enthusiastic headlines that followed a modest increase in growth and a modest decline in jobless claims - suggest that some people still don't get it. So here's a brief refresher course on twilight zone Economics 101.
Since November 2001 - which the National Bureau of Economic Research, in a controversial decision, has declared the end of the recession - the U.S. economy has grown at an annual rate of about 2.6 percent. That may not sound so bad, but when it comes to jobs there has been no recovery at all. Nonfarm payrolls have fallen by, on average, 50,000 per month since the "recovery" began, accounting for 1 million of the 2.7 million jobs lost since March 2001.
Meanwhile, employment is chasing a moving target because the working-age population continues to grow. Just to keep up with population growth, the U.S. needs to add about 110,000 jobs per month. When it falls short of that, jobs become steadily harder to find. At this point conditions in the labor market are probably the worst they have been for almost 20 years. (The measured unemployment rate isn't all that high, but that's largely because many people have given up looking for work.)
All this leads to a great deal of suffering - not just lost income, but also the anxiety and humiliation that come with long-term unemployment. Is relief in sight?
Over the last few weeks two numbers have led to a spate of optimistic pronouncements. One is the preliminary estimate of second-quarter growth, which came in at a 2.4 percent annual rate - about one point higher than expected. The other is the rate of new applications for unemployment insurance, which has fallen slightly below 400,000 per week.
But while the growth and new claims numbers were good news, they didn't tell us that the economy is improving. All they said is that things are getting worse more slowly.
This should be obvious when it comes to growth. I saw headlines saying that in the second quarter growth "soared," even "rocketed." Huh? That 2.4 percent growth rate was a bit less than the average during our job-loss recovery. Just to stabilize the labor market in its present dismal state would probably take growth of at least 3.5 percent; it would take much more than that to return the economy to anything resembling full employment.
Meanwhile, about those unemployment claims: somehow that 400,000-per-week benchmark has acquired a lot more significance in people's minds than it deserves. For example, claims came in at 398,000 yesterday - and this was treated as good news because it was (barely) below the magic number.
Well, here's some perspective: since November 2001 new claims have averaged 414,000 per week. A number a bit lower than that might mean stable or slightly rising payroll employment - but as we've just seen, that's not nearly good enough. For comparison, in 2000 - a year of good but not great employment growth - weekly claims averaged 305,000. My conclusion is that the state of the unemployed won't improve unless claims fall a lot further than they have.
So is a real, unambiguous recovery just around the corner? Recent economic reports have had a "good news"-"bad news" feel to them. Businesses are starting to buy some equipment; that's good. But they seem to be engaging in replacement investment, not capacity expansion; that's bad. Consumers are spending; that's good. But rising interest rates seem to have ended the refinancing boom that put cash in consumers' pockets; that's bad. And so on.
The best guess is that growth in the second half of the year will be faster than in the first half, possibly high enough to create some jobs, but not high enough to make jobs easier to find. In other words, in terms of what matters most, the economy will continue to deteriorate.
All this is, of course, an indictment of our economic policy - a policy that has managed the remarkable trick of generating immense budget deficits without giving the economy much stimulus. But that's a subject for another day.