Chart Book: The Legacy of the Great Recession
April 11, 2017
The United States went through its longest, and by most measures worst economic recession since the Great Depression between December 2007 and June 2009. This chart book documents 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 June 2009
The Economy Began Growing in Mid-2009
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. The economy began growing in 2009, and has averaged 2.1 percent annual growth since then.
Employers Have Added Nearly 200,000 Jobs a Month Since Early 2010
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 in 2010 was obscured by the rapid ramp-up and subsequent decline in government hiring for the 2010 Census, but private employers have added 16.3 million jobs to their payrolls in the 85 months of sustained growth since February 2010, an average of 192,000 jobs a month. Total employment (private plus government) has averaged 190,000 a month over that period, as federal, state, and especially local government were net job losers. In March, private employers added 89,000 jobs. Federal government employment fell by 1,000, state employment rose by 1,000, and local employment rose by 9,000. The net gain in total nonfarm employment was 98,000 jobs. Total employment (private plus government) has increased every month for the past 78 months.
Part II: The Recession Put the Economy in a Deep Hole
GDP Fell Far Below What the Economy Was Capable of Producing
In the fourth quarter of 2016, the demand for goods and services (actual GDP) was roughly $166 billion (about 0.9 percent) less than what the economy was capable of supplying (potential GDP). This output gap, which is manifested in excess unemployment and underemployment and idle productive capacity among businesses, is the legacy of the Great Recession. Congressional Budget Office projections show the gap closing over the next few years as actual GDP grows somewhat faster than potential GDP.
GDP rose at a 2.1 percent annual rate in the fourth quarter of 2016 and was 2.0 percent higher than in the same quarter a year ago. The latter figure is lower than the 2.1 percent average annual growth since the start of the recovery, which has been insufficient to close the output gap.
In its January 2017 Budget and Economic Outlook, CBO projects that actual GDP will grow faster than potential over the next two years and the gap between the two will largely disappear. CBO does not try to forecast business-cycle fluctuations, but instead assumes that after 2018 actual GDP will be 0.5 percentage points lower than potential GDP, roughly reflecting the average historical gap.
Job Losses Were Unprecedented
Employers began to add jobs in 2010. Progress erasing the jobs deficit was slow for some time, but the economy has now recovered the 8.7 million jobs lost between the start of the recession in December 2007 and early 2010 and continued to add jobs since. Nonfarm payroll employment was 5.4 percent (7.4 million) higher in March 2017 than it was at the start of the recession.
Surpassing the pre-recession peak was a milestone on the way to a full jobs recovery, but population growth over the past several years means the potential labor force is larger than it was then. Job creation has averaged 182,000 a month over the past 12 months, and 178,000 over the past three months. Those rates are well above what’s required to keep up with potential labor force growth (the pace of job creation that’s appropriate once the economy is back to full health).
The Unemployment Rate Rose to Near Its Postwar High...
The unemployment rate 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. Technically, the recession that began in December 2007 ended in June 2009 as the economy began growing again, but the unemployment rate did not fall to 5.0 percent, where it was at the start of the recession, until late 2015. The unemployment rate has been under 5.0 percent for the last 11 months and was 4.5 percent in March.
...And Stayed High Long After the End of the Recession
The relatively modest pace of job growth in the first years of the recovery kept the unemployment rate high long after the end of the recession. This is similar to what happened in the previous two recessions, and does not resemble the fairly rapid decline that followed the severe 1981-82 recession. While the unemployment rate is much lower now than it was early in the recovery, other indicators like those discussed below suggest there is still some "slack" (people who are not working but want to be or people who would like to be working full time but can only find part-time jobs) in the labor market.
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 discouragement over the prospects 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 the recession and stayed low through much of the recovery. It began to move up in 2014 and 2015 as falling unemployment offset still-falling labor force participation. In March, the labor force participation rate was 63.0 percent, 0.2 percentage points above its average rate in 2016; the employment-to-population ratio was 60.1 percent, 0.4 percentage points above its average rate in 2016.
Long-Term Unemployment Rose to Historic Highs
Long term unemployment reached much higher levels and persisted much longer in the Great Recession and subsequent jobs slump than in any previous period in data that go back to the late 1940s. The worst previous episode was in the early 1980s, when the long-term unemployment share peaked at 26.0 percent and the long-term unemployment rate peaked at 2.6 percent. Moreover, in the earlier episode, a year after peaking at 2.6 percent, the long-term unemployment rate had dropped to 1.4 percent. It took six years from the end of the Great Recession to reach that rate, which it did in June of 2015. That rate has changed little since and was 1.1 percent in March. Still, more than one in five (23.3 percent) of the 7.2 million people who were unemployed — 1.7 million people — 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 November 2009 in data that go back to 1994. In March 2017, this rate was 8.9 percent, still above its pre-recession level.
Growth in Workers Earnings Has Been Modest, but Starting to Pick Up
Average hourly earnings of employees on private payrolls grew modestly through much of the recovery, and to date have averaged 2.2 percent annually. Inflation has been modest as well, but over the course of the economic recovery, real (inflation-adjusted) wages have hardly grown and have failed to keep up with increases in workers' productivity (output produced per hour of work). As a result, the share of national income going to profits has increased relative to that going to wages.
Both inflation and productivity have fluctuated more than nominal earnings during this period, but, on average, productivity has risen at a little less than 1 percent per year since the end of the recession and the cost of a typical worker’s market basket has risen about 1½ percent per year over the same period—although inflation has begun to move up in recent months.
Things have improved recently. In March, average hourly earnings of all employees on private payrolls were 2.7 percent higher than a year earlier (although earnings of non-management employees were up only 2.3 percent). Low inflation in 2015 and 2016 led to solid real wage gains, but strong nominal wage growth will be required to maintain such gains if inflation rises further.
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 7 people looking for work for every job opening. That ratio has declined substantially but probably has some room to fall further in an improving labor market (it was close to 1 to 1 just before the 2001 recession). In February 2017, 7.5 million workers were unemployed, compared with 5.7 million job openings (a ratio of 13 job seekers for every 10 job openings). If labor markets continue to tighten, employers are likely to fill open positions more quickly, further reducing the number of job seekers relative to the number of job openings.
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 finds that GDP has been higher each year since 2009 than it would have been without the Recovery Act (with the largest impact in 2010 when GDP was between 0.7 and 4.1 percent higher than it otherwise would have been). The impact diminished, as expected, as the economy recovered, but CBO estimates that even at the end of 2012 GDP was between 0.1 and 0.6 percent larger than it would have been without the Recovery Act.
...And Unemployment Would Have Been Higher
The Congressional Budget Office estimated that because of the Recovery Act, the unemployment rate has been lower each year since 2009 than it otherwise would have been. The maximum effect was in 2010, but CBO estimates that even in the fourth quarter of 2012 the unemployment rate was 0.1 to 0.4 percentage points lower than it otherwise would have been and employment was between 0.1 million and 0.8 million jobs greater than it otherwise would have been.