The United States went through its longest, and by most measures worst economic recession since the Great Depression between December 2007 and the middle of 2009. This chartbook will document the course of the economy following that recession against the background of how deep a hole the recession created – and how much deeper that hole would have been without the financial stabilization and fiscal stimulus policies enacted in late 2008 and early 2009.
Part I: Recovery Began in Mid-2009
The Economy Has Been Growing
Economic activity as measured by real (inflation-adjusted) gross domestic product (GDP) was contracting sharply when policymakers enacted the financial stabilization bill (TARP) and the American Recovery and Reinvestment Act, but the economy has now grown for four straight quarters.
The Private Sector Has Begun to Add Jobs
The pace of monthly job losses slowed dramatically soon after President Obama and Congress enacted the Recovery Act in February 2009. The trend in job growth this year has been difficult to discern because of the rapid ramp-up and subsequent decline in government hiring for the 2010 Census, but private employers have added a total of 630,000 jobs to their payrolls so far this year.
Part II: The Recession Put the Economy in a Deep Hole
GDP Fell Far Below What the Economy Was Capable of Producing
In the second quarter of 2010, the demand for goods and services (actual GDP) was over $830 billion (6 percent) less than what the economy was capable of supplying (potential GDP). This large output gap, which is manifested in a high rate of unemployment and substantial idle productive capacity among businesses, is the legacy of the Great Recession. Congressional Budget Office projections show the gap closing slowly over the next several years as actual GDP grows only moderately faster than potential GDP.
GDP growth slowed to a disappointing 1.6 percent in the second quarter — that’s not even enough to keep up with growth in the economy’s potential to produce goods and services stemming from labor force and productivity increases. Growth of 4 percent or better is needed to propel the economy back toward full employment more rapidly.
Job Losses Were Unprecedented
Although job losses have bottomed out, the huge jobs losses since the recession began in December of 2007 have left nonfarm payroll employment almost 7 percent (7.7 million jobs) lower in July 2010 than it was then.
The jobs deficit from this recession is much larger than those in previous recessions. The economy would have to create an average of over 300,000 jobs a month for two years just to return to the December 2007 level of employment — and even more to restore full employment, since the population and potential labor force are now larger. Most forecasters expect the economy to grow much more slowly than that, especially as the stimulus from the Recovery Act winds down.
The Unemployment Rate Rose to Near Its Postwar High …
Technically, the recession that began in December 2007 likely ended sometime in the summer of 2009 (we assume in June) as the economy began growing again. But, the pace of growth has not been strong enough to reduce the unemployment rate, which rose far higher than in the previous two recessions and far faster than (though not quite as high as) in the deep 1981-82 recession.
… And Could Stay High for Some Time
Unless the pace of economic growth and job creation picks up dramatically, the unemployment rate could remain high as it did in the previous two recessions rather than decline fairly rapidly as it did following the severe 1981-82 recession.
The Share of the Population with a Job Fell to Levels Not Seen Since the Mid-1980s
The sharp rise in the unemployment rate and the increasingly discouraging prospect of finding a job caused a decline in the percentage of the population in the labor force (those either working or looking for work). As a result of rising unemployment and declining labor force participation, the percentage of the population with a job fell sharply. In July 2010, both the labor force participation rate and the percentage of the population with a job remained near lows that were last seen in the 1980s.
Long-term Unemployment Rose to Historic Highs
During the recession, the share of the labor force unemployed for more than 26 weeks rose higher than at any point in the past six decades (the next highest was 2.6 percent in June 1983). Long-term unemployment remains a significant concern: over two-fifths (44.9 percent) of the 14.6 million people who were unemployed in July 2010 had been looking for work for 27 weeks or longer.
Labor Market Slack Reached a Record High
The Labor Department’s most comprehensive alternative unemployment rate measure — which includes people who want to work but are discouraged from looking and people working part time because they can’t find full-time jobs — recorded its highest reading on record in data that go back to 1994. In July 2010, this rate stood at 16.5 percent.
The Number of People Looking for Work Swelled Compared with the Number of Job Openings
At one point at the beginning of the recovery there were 6 people looking for work for every job opening. That ratio remains high. In May 2010, 15.0 million workers were unemployed but there were only 3.2 million job openings, or about five unemployed workers for each available job.
Part III: The Great Recession Would Have Been Even Worse without Financial Stabilization and Fiscal Stimulus Policies
GDP Would Have Been Lower Without the Recovery Act …
The Recovery Act was designed to boost the demand for goods and services above what it otherwise would be in order to preserve jobs in the recession and create them in the recovery. The Congressional Budget Office estimates that GDP in the second quarter of 2010 is between 1.7 and 4.5 percent larger than it would have been without the Recovery Act.
… And Unemployment Would Have Been Higher
The Congressional Budget Office estimates that without the Recovery Act, the unemployment rate in 2010 would have been 0.7 to 1.8 percentage points higher than it actually will be and payroll employment will be between 1.3 million and 3.3 million jobs greater than it would have been.
The Gap Between Actual and Full-Employment GDP Would Have Been Much Larger Without TARP and the Recovery Act
It is not possible to rerun history to know for sure what would have happened if policymakers had not responded to the economy’s problems with significant financial stabilization and fiscal stimulus measures. However, Former Federal Reserve Vice Chairman Alan Blinder and Mark Zandi of Moody’s Economy.com have done an econometric analysis which finds that that things would have been far worse with no policy response.
As Blinder and Zandi say, the government’s policy response “probably averted what could have been called Great Depression 2.0.” They estimate that without TARP and the Recovery Act, GDP would have been nearly $1.4 trillion (in 2005 dollars) lower in the second quarter of 2010 than it actually was.
