when will the us economy recover? what is "recovery," anyway?
DESCRIPTION
The term "economic recovery" has no official definition. Depending on the benchmark one uses, the US economy may already have recovered from the Great Recession, may recover soon, or may never recoverTRANSCRIPT
Economics for your ClassroomEd Dolan’s Econ Blog
When Will the Economy Recover?What is “Recovery,” Anyway?
July 2, 2014
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When Will the Economy Recover? Public Opinion
In June, 2014, a CNNMoney poll asked Americans when they thought the economy would recover
Only 3% thought it had already recovered
61% thought recovery would take 3 more years or longer
3% thought it would never recover Are these views reasonable? How
do they compare with those of professional economists?
July 2, 2014 Ed Dolan’s Econ Blog
What is the Definition of Recovery?
There is no universally accepted definition of “recovery” in business cycle terminology
Official sources use the term recession for any period when the economy is contracting and expansion for any period when it is growing
Economists and popular writers often use recovery to mean the early part of an expansion, when the economy is getting back to normal after a recession
July 2, 2014 Ed Dolan’s Econ Blog
The Business Cycle Dating Committee of the National Bureau of Economic Research officially defines the phases of the business cycle as follows:
“A recession is a period between a peak and a trough, and an expansion is a period between a trough and a peak.”
(Link to Committee website)
Previous Peak GDP as a Benchmark for Recovery
One possible benchmark for “getting back to normal” is the previous peak of real GDP
If we use that benchmark, the recovery was completed in the second quarter of 2011
By the end of 2013, the economy had reached a level of real GDP 6 percent above the previous peak
July 2, 2014 Ed Dolan’s Econ Blog
Potential Real GDP as a Benchmark for Recovery
Instead, we could use potential real GDP as our benchmark for “back to normal”
The Congressional Budget Office defines potential real GDP as the level of output that is sustainable in the long run without causing excessive inflation
As this figure shows, at the rate the US economy has grown since the start of the recovery, it would never reach the CBO estimate of potential GDP
July 2, 2014 Ed Dolan’s Econ Blog
Payroll Employment as a Benchmark for Recovery
When many people speak of “recovery,” they think of the job market rather than GDP
If we use the previous peak of nonfarm payroll employment as a benchmark, the economy completed the recovery in May 2014
However, if we use the prerecession trend as a benchmark, the economy may never get back to “normal”
July 2, 2014 Ed Dolan’s Econ Blog
Employment Ratio Benchmarks
Instead, we could use employment ratios as our benchmarks
The unemployment rate is the ratio of unemployed workers to the labor force. As of mid-2014, it is well on its way to the pre-recession norm of about 5.5 percent
The employment population ratio is the ratio of employed workers to the adult population. It decreased sharply during the Great Recession and is unlikely ever to return to its prerecession norm, in part because of an aging population
July 2, 2014 Ed Dolan’s Econ Blog
The Fed’s Dual Mandate as a Benchmark for Recovery
The Fed has its own benchmark for recovery, based on its dual mandate to maintain full employment and stable prices
Its target for inflation is 2 percent per year as measured by the deflator for personal consumption expenditures
Its target for unemployment is 5.25 to 5.75 percent
The Fed expects to reach both of its targets by 2016
July 2, 2014 Ed Dolan’s Econ Blog
The red crosshairs and circles show the Fed’s target of 5.5% unemployment and 2% inflation. The blue line shows actual performance since 2010. The green circles show forecasts for 2015 and 2016
The Bottom Line
The answer to the question of when the economy will recover depends on the benchmark we use If we use the previous peak of GDP or
payroll jobs, the economy has already recovered
If we use the unemployment rate or the Fed’s dual mandate, it will probably recover by 2015 or 2016
If we use potential real GDP or the employment population ratio, the economy may never recover
July 2, 2014 Ed Dolan’s Econ Blog
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