The recession’s end?

What's at stake: It was about one year ago that the phrase "green shoots" began being batted around, as economic trends which had been deteriorating at an increasing pace started deteriorating at a declining pace. By late summer, a number of important economic indicators – including GDP – had moved all the way back to expansion, and many economists felt comfortable asserting that the recession was officially over. But for the next nine months, there was little sign that the recovery was feeding back through to the labour market, or that it would prove particularly durable in the absence of government supports. But finally we're starting to see some convincing indications of economic recovery. Perhaps the biggest news was the March employment report from the US Bureau of Labour Statistics, whose establishment survey estimated that U.S. employment increased by 162,000 workers in March on a seasonally adjusted basis.

Jeff Frankel, who sits on the NBER’s recession-dating committee, says the final piece has fallen into place to call the end of the recession with the BLS announcement that employment rose in March. Identifying the beginnings and ends of recessions has been difficult in recent decades because the two most important indicators, output and employment, have sometimes behaved differently from each other. Most notoriously, in the recovery that began in November 2001, employment lagged far behind economic growth. If one had gone by the labour market, one might have called it a three year recession. But if one had gone by GDP, one might have wondered whether there was a recession at all. This time around, the difficulty is not so great. Contrary to some impressions, the labour market in this recovery has not lagged unusually far behind the rest of the economy as the lag between positive income growth (June 2009) and positive job growth (March 2010) turned out to be shorter than in the preceding two recessions (one to two years).

Jim Hamilton puts the employment report in a class of several other pieces of good economic news. U.S. light vehicle sales in March were up 24% from the previous year, the first impressive year-over-year improvement in quite some time, and the best month we've seen since August 2008, if you don't count the cash-for-clunkers August of 2009. The Institute for Supply Management PMI manufacturing index also looked great, rising to 59.6 for March. This means that managers reporting improvements outnumbered those reporting declines by the highest margin seen since 2004. Improvements in PMI numbers are also being reported around the world; see the Wall Street Journal for a nice tabular summary.

Mark Thoma is sceptical. Frankel may well be right, but he’s waiting for more than one month of somewhat encouraging employment data before coming to that conclusion. It's always possible that one month is a blip, not a trend. In addition, the conclusion is based upon the fact that labour markets are exhibiting positive growth, but positive growth is all that is required, the strength of the growth is not the determining factor. However, even though growth is positive, it is very sluggish and as David Altig notes, at a pace of 162,000 jobs added per month and at the current labour force participation rate, the unemployment rate will still be over 9% a year from now. So this is by no means an "all clear" signal for labour markets.

Narayana R. Kocherlakota, President Federal Reserve Bank of Minneapolis believes that we will have significant growth in output without seeing a major turnaround in the housing market. Yes, the housing sector is important, but residential investment makes up just 2.8 percent of the country’s gross domestic product. Calculated Risk picks up on that claim and writes that this is an error in analysis. Back in 2005, several analysts argued it was wrong to think that a housing bust would eventually take the economy into recession – they said residential investment was only 6% of the U.S. economy! They were wrong because they didn't consider all the add-on effects – and the impact of financial distress. Now residential investment is only 2.5 percent of GDP, and Kocherlakota is making the inverse faulty argument. During previous recoveries, housing played a critical role in job creation and consumer spending. It isn't the size of the sector, but the contribution during the recovery that matters – and housing is usually the largest contributor to economic growth early in a recovery. In another post, Calculated Risk documents the historical correlation between housing starts and unemployment. 

Ryan Avent notes that while growth in commodities prices is a positive sign, it's also a potential threat. As the global economy has continued to move away from the abyss, the price of crude has climbed back to near $90 a barrel. Increases much beyond that will begin to squeeze household budgets in places heavily dependent on oil. If those increases happen slowly, then they won’t be that damaging; households will have time to adjust commutes, buy more efficient vehicles, and find other ways to substitute away from petrol. If they happen rapidly, then the result will be enough damage to consumer spending to tip the American economy back toward, and perhaps into, recession. There’s really not much that can be done about this in the short term. Officials simply need to hope that households have continued to reduce their exposure to petroleum prices in the wake of the 2007-2008 spike in the cost of crude.

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