(Analysis) Into a sixth year since the onset of the 2008-9 recession, the economic recovery remains lackluster. Employment by private industry in the US is still down by 1.6% in April when compared to 2007, even though the US population is larger. The headline unemployment rate remains elevated at 7.5%, and a broader measure of labor under-utilization is 13.9%. The labor-force participation rate is down because many have simply given up looking for work. Those who are not looking for work – so-called discouraged workers, are not counted in the official headline unemployment rate. These statistics show that the US labor market is failing to achieve anything close to full employment.
Many have noticed that recovery after a financial crisis is stubbornly slow [pdf]. Because credit is important to a modern economy – to grease the wheels so to speak, it is logical that a weakened finance industry will impede overall performance in the real economy. An additional reason suggested for credit tightening after a financial crisis is called the “pro-cyclicality” of banks’ perception of risk, which is just a fancy way of saying that they are too loose with credit in good economic times, and too restrictive in bad times. The underlying reason surmised for this behavior is that during good economic times banks irrationally discount risk, while in bad times their perception of risk is inflated by panic.
There is evidence in the officially reported data to suggest that fear among all corporations – not only among those in the finance industry, is holding back an economic recovery and full employment. The chart shows both real (inflation-adjusted) non-financial corporate profits, and real cash and deposits held by non-farm, non-financial corporations. Both are reported quarterly as an index of their average value in 2007, the year before the onset of the “Great Recession”, and both show full recovery from the recession – and then some. An index for employment by all private non-financial industry is provided for comparison.
Given both record corporate profits – 16% higher than before the recession on an inflation-adjusted basis, and large amounts of cash held idle by corporations, there is an obvious question: why are corporations not investing and hiring more? A possible answer to this question is fear among business managers to fail.
During the downturn, corporations shed millions of positions in an attempt to cut costs, including many managers. Those managers who remain employed today have little incentive personally to grow investment and hire as corporations report record profits. A culture of fear dominates hiring practices currently, where the potential risks from additional hiring are seen as outweighing any benefit from additional staff. Whereas many pundits claim a skills shortage among the workforce is hampering employment growth, the reality is that the US workforce is more educated than at any time before, but corporations can pick out from among the millions of unemployed people those who do not require what historically is common training for new employees.
Fear to grow and invest by business is a recurring theme during bad economic times. It is one reason why near-zero interest rates are failing to produce good recovery – the business sector is simply too “skittish” to invest more than it already is. It is also a good reason to support more fiscal stimulus by the federal government, because if business cannot or will not invest to employ idle resources – in this case cash and labor, then there is one power that can: the federal government. The federal government’s borrowing costs are very low currently, which allows for it to borrow on the cheap in order to stimulate economic activity, ramp up employment, and repair our decaying infrastructure.