(Analysis) The keepers of recession dates, the NBER, declared the second quarter of 2009 to be the final period of recession following the financial crisis of 2007-8. Every quarter since, observers try to interpret lackluster economic performance in order to show how our economy is improving. If you are reading this from home while trying to balance your checkbook after working 2+ jobs for low wages, you are probably wondering how the economy can be improving while your financial condition – and that of most people you know – is stagnant or deteriorating.
This analysis shows that although inflation-adjusted GDP is rising, there is a large discrepancy between a healthy economy and today’s. Three simple charts are presented, all showing an economy that is far from its potential. The first chart shows inflation-adjusted output minus what economists believe the economy can potentially produce (see chart above left). A negative reading means that the economy is delivering fewer goods and services than it is reckoned to be capable of producing. There is currently an $800 billion gap estimated between current levels of output and the economy’s potential. The trend is positive, but depressingly weak.
The second chart (at bottom left) shows a ratio of the number of people working to the total population. This is much more revealing than the headline unemployment rate, for this ratio is not affected by temporary changes to who is considered to be part of the labor force. It also shows a depressed level, but one that is “flatlining” – there is no improvement since the depths of the recession in 2008-9.
The final chart (at bottom right) shows nominal fixed investment by business as a percent of potential nominal GDP. In this chart, business investment remains sluggish, explaining why the economy is not adding sufficiently to employment, and hence why economic output is so far from its estimated potential.
Hopefully this analysis will prove enlightening to many who cannot understand their current circumstances when reading about how stocks and wealth have returned to pre-recessionary levels. It is true that wealth is up on average, but this average hides for whom wealth has returned: only the very wealthy. Unfortunately, this uptick in wealth is not resulting in a return of investment to the US; instead, it is heading overseas to reap higher returns where labor costs are much lower (as it has increasingly – hence “globalization”).