Federal Reservations

"My best guess is that we'll have a continued recovery, but it won't feel terrific. Even though technically we'll be in recovery and the economy will be growing, unemployment will still be high for a while and that means that a lot of people will be under financial stress." -- Benjamin Bernanke, Chairman of the Federal Reserve in a Q&A at the Woodrow Wilson International Center for Scholars

Originally from The Market Oracle

Recessions Are on the Margin A Rose is Still a Rose If It Feels Like a Recession The Rough Road Back And the data out over the last few weeks tells us it is getting better. Does this take us out of the double-dip woods, even as the Fed is lowering its forecast? And what is a recession? Yes, we all know it's when the economy doesn't grow, but we are in a rather unique economic environment, this time. Maybe things are getting better, but is it enough to get us back on the road to full employment?

Originally from The Market Oracle

by Mike Kimel
Cross posted at the Presimetrics blog

Employment During Recoveries from Recessions - Long Term Trends

The following graph of the employment to population ratio was obtained from the Federal Reserve Economic Database (FRED). The employment to population ratio shows the percentage of American civilians age 16 and over that happen to be employed. Recessions are shaded gray.


Figure 1.

The graph shows that between about 1960 and 2000, the percentage of civilians that were employed tended to rise over time, though those increases were interrupted with big drops in the ratio during recessions. That increase has a number of explanations, among them that women in the workplace is no longer a scandalous thing, that a single paycheck is often no longer enough to sustain the typical household, and that as manual labor's share of the workforce has fallen retiring later has become more and more feasible.

Since 2000, the picture is more nuanced - there has still been an increase in the percentage of American civilians that are employed during non-recessionary periods, but that increase has not been enough for many people who lost their jobs during recessions find new employment. In fact, the recent drop in the employment to population ratio has brought the percentage of civilians with jobs down to levels last seen in 1983.

So what is going on here?

One clue can be seen by looking at how quickly the economy has regenerated lost jobs after each recessions. The following graph shows the employment to population ratio in months following recessions relative to the employment to population ratio in the month that a recession ends. Thus, if the employment to population ratio has risen since the end of a recession, that number should be above 100%, and if it has fallen, that number should be below 100%. Every recession since 1948 - the first year for which employment to population data is available - is shown on the graph. Because, for reasons that will be evident in a moment, I had to label each recession (or rather, post-recession period), the graph is a little busy. Note also that I am assuming that the most recession ended in June of 2009, even if the recovery has been very weak and unpleasant since.


Figure 2.

Now, assuming that the latest recession ended in June of 2009, we're about 14 months out from last recession. The first thing the graph shows us is that for most of the recessions in our sample, the employment to population ratio continued decreasing after the recession ended; that is to say, job losses continued after the recession ended. And for four of the eleven recessions (including the latest one), the employment to population ratio 14 months after the end of the recession is still below where it was when the recession ended.

But look closer, and you see something else, something more disconcerting. It seems that the more recent the recession, the poorer the job recovery. In fact, three worst job recoveries came after the last three recessions, and the 1991 and 2001 recessions were pretty mild. (And, to repeat a point from above... the job market never quite recovered after the 2001 recession.)

Possible reasons for this long term trend in the worsening of job recoveries that come to mind include:

1. simple mathematics - as the employment to population ratio rises, recovering to that high level becomes harder and harder. Of course, the latest recession belies that, though in fairness, it was a much more severe downturn.
2. it has, over time, become easier to fire employees and move the jobs to jurisdictions where the new employees are less likely (i.e., able) to complain. In the 50s and 60s, jobs started migrating from the Midwest to the South (more union to less union), and now they're migrating out of the country altogether. That makes it easier for a company to operate with fewer employers for extended periods of time, and thus expand for a while after the end of a recession without bringing on new workers.

Your thoughts?

Originally from Angry Bear

by Mike Kimel

Cross posted at the Presimetrics Blog.

A Look at the Current Recession, A Signpost for the Start of Recessions & Some Thoughts on the Likelihood of a Double Dip

These days there’s a lot of talk about whether the recession is going to double dip. And frankly, there’s a lotta yadda yadda, some bad news, and some not-so-bad news. You’ve heard it all before, you don’t need to hear it again from me, and frankly, I’d like to take a different approach. Before launching in, links to all data sources will be provided at the bottom of the post.
Let’s get started with a look at the pace of recoveries from recessions and how the current one compares to others. The graph below shows the percentage change in real GDP per capita each quarter from the end of a recession. Every recession since 1947, the first year for which quarterly data is available, is depicted.

Figure 1

The graph makes a few things apparent. First, it is clear that the double dip or no double dip, the current recovery is pretty feeble. Second, the most recent recoveries have all been pretty feeble.

Things look even worse when one looks at recoveries from deep recessions:

Figure 2



Part of this feebleness is no doubt due to the government’s policies. As I’ve noted before, the data shows that when tax rates were cut during or right after a recession, recoveries were slower and shorter. And both GW and Obama were happily cutting taxes of one sort or another during the latest recession. And of course, the government spending they threw on as a stimulus was in large part ill-conceived, going to benefit primarily some of the parties most responsible for the meltdown, buying toxic assets at inflated prices, and trying to prop up housing prices that should have been allowed to fall.

But what’s there is there. The question du jour is double dips – is the economy going to fall into another recession so quickly after coming out of the previous one, as occurred in 1981, or repeated times in the 1920s?

To answer that question, we need to know what causes recessions. While the academic literature has some complex explanations which depend on all sorts of odd assumptions, I think the answer is simple. The following graph shows the 12 month percentage change in real M1 per capita in the month that a recession begins. M1 is simply the narrowest of the Fed’s measures of the money supply (cash, money in checking accounts, and traveler’s checks), and I’ve adjusted it for inflation and population. Note that the Fed from 1947 to 1958, the Fed doesn’t report M1, but it does report “money stock” which is sufficiently similar to use in its place.

Figure 3

Notice that every recession except one, the one that began in July of ’53, began after the Fed reduced the real M1 per capita by at least 2%. That’s enough to suggest that the change in real money supply per person may well matter; no certainty, but it’s a suggestion.

Assuming for the moment that real M1 per capita does matter, notice that the twelve month change in that variable through June of this year is about 2.8%, which doesn’t make it look an awful lot like a recession about to begin, even if (to repeat the points of Figures 1 and 2) the recovery is crummy.

But the graph also suggests that the theory needs something in order to be complete – it needs to be improved in order to explain July of ’53. What happened then? The big event at about that time was the wind-down from the Korean War. Another way to look at it… real government spending was about to start dropping a lot. Additionally, the very next month, the 12 month change in real M1 per capita went negative, and it stayed negative through the duration of the recession.

Call a drop in real M1 per capita a necessary but not sufficient condition for a recession, at least so far. Now, it is quite possible, pace Rogoff & Reinhart that this time it will be different. I would imagine that the way the Fed has put money into the economy lately, essentially giving freebies to badly run financial institutions, is not quite as useful as its usual M.O. In that case, it might take more than just being on the positive side of the real M1 per capita ledger to make a difference. And check out where that variable is going, anyhow:

Figure 4

It’s down quite a bit… but still it is positive. Can that number go negative in a hurry? Ayup. But the last bit of information we’ve had doesn’t seem to show that.

So what’s the conclusion? I’ve never had much of a problem going out on a limb. Back in March of 2008 I had my first few posts discussing the recession we were in, at a time when the consensus was that we weren’t in one. And check out the comments when I claimed, back in December of ’08 real GDP per that the recession would be over in the first half of the year. (Yes, I know, the post went up in January. And yes, I know the NBER hasn’t called the end of the recession yet but real GDP bottomed out in the second quarter of ’09.) This time, I’m not as comfortable; given where and how the Fed has been putting Money I just don’t see increases in the real money supply as being quite as effective as normal. The money is going to fill in a big hole the financial industry created in its collective balance sheet, and isn’t necessarily leading to a lot of additional spending. Furthermore, with all the talk of austerity, it wouldn’t be surprising if the Federal Government starts cutting back on spending.

So I’m just not sure. But as often as not, when things are bad enough for everyone to see a problem, they’re not as bad as most people think. Given that the weight of the evidence seems almost equally balanced on both sides, this little thing tips it slightly for me: unless and until the Fed starts removing money from the system, I don’t think we’re going into a second dip. But given the Federal Government’s current policies, I don’t expect much more than mediocre growth for the next few quarters either.



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Data Sources

FRED, the Federal Reserve Database, was the source for most of the data used to compute real M1 per capita: population from 1952 to the present , M1 from 1958 on and M1 from 1958 on.

Quarterly data on real GDP per capita and population. Note – the quarterly population figures were used to extrapolate monthly population for 1947 to 1952.

Finally, money stock figures were substituted in for M1 from 1947 to 1957. Those were copied by hand from this document at the Federal Reserve of St. Louis’ FRASER archives

Mike Kimel

Originally from Angry Bear