The Economic Recovery Five Years after the Financial Crisis

By Stock, James H. | Business Economics, January 2014 | Go to article overview

The Economic Recovery Five Years after the Financial Crisis


Stock, James H., Business Economics


The slow recovery .from the recession that ended in 2009 has been the subject of much analysis and comment. However, has the recovery really been slower than expected given the magnitude of the recession, historical patterns, and long-term changes in the U.S. economy and labor force? it is .contended here that when these factors are taken into account, the recovery is fairly typical of the post-I960 experience. This paper lays out this case, after providing an overview of the economy as of September 2013. It then turns to the factors underlying the long-term trend of declining labor force participation and concludes- by offering implications for policy.

Business Economics (2014) 49, 21-26.

doi:10.1057/be.2013.33

Keywords: economic recovery, labor force participation, demographics, long-term growth, financial crisis

The week of September 9, 2013 marks the fifth anniversary of the collapse of Lehman and the financial crisis, which in turn led to our deepest recession since the Great Depression. I am going to take this opportunity to provide a retrospective analysis of the recovery that started in June 2009 and will focus on two aspects. First, although the private sector has added jobs in each of the past 42 months and GDP per capita has effectively re-achieved its pre-recession peak, we are still not fully satisfied with the pace of growth. The question I will address, however, is whether this recovery has been slower than would have been expected, given the magnitude of the recession, historical patterns, and long-term changes in the U.S. economy and labor force. My answer will be that, from the perspective of growth of GDP, growth of employment, and the decline of the unemployment rate, this recovery has in fact been typical of the post-1960 experience, given the underlying trends and the nature of the shocks we have faced. Specifically, while the growth of GDP and employment has not been as fast in this recovery as it was on average following previous post- 1960 recessions, those comparisons neglect changes in underlying demographics that affect the long-term potential growth rates of the labor force and thus of potential GDP growth. Once those underlying supply-side factors are explicitly accounted for, the differences between the current recovery and previous post-1960 recoveries are relatively small and are readily accounted for by factors related to the financial crisis.

The second topic I will focus on is an aspect of this recovery that has received a lot of attention: the decline in the labor force participation rate. Understanding the extent to which the behavior of labor force participation in this recovery has been consistent with historical cyclical experience, or has been unusual, is complicated because of the changing demographic trends in labor force participation. I will therefore spend some time reviewing some factors influencing the trend and cyclical components of lahor force participation.

1. The Economy as of September 2013

Before turning to those two topics, let me start with a brief overview of the recovery and the current situation. Since peaking at 10 percent in October 2009, the unemployment rate has fallen to 7.3 percent as of September 2013. During the previous 24 months the economy has added, on average, approximately 180,000 jobs per month. Indeed, as Figure 1 shows, I 2-month employment growth has hovered just above two million jobs per year for the past two years. whether measured by establishment employment or by household survey employment. Although we all focus on establishment employment because its survey sample size is so much larger. this figure also includes the 12-month growth of the BLS-adjusted household 'employment series, where the BLS adjustment puts household employment on a conceptually comparable basis to the establishment employment series. Both series provide the same picture, albeit with much more noise in the household survey. …

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