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Chart Book: The Legacy of the Great Recession

UPDATED
February 9, 2016

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.

Private Payroll Employment Has Grown For 71 Months

 

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 (which is now over), but private employers have added 14.0 million jobs to their payrolls in the 71 months since February 2010, an average of 197,000 jobs a month. Total employment (private plus government) has averaged 191,000 over that period, as federal, state, and especially local government were net job losers.  In January, private employers added 158,000 jobs. Federal and state government employment fell by 8,000 and 10,000 respectively, while local government employment rose by 11,000.

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 2015, the demand for goods and services (actual GDP) was roughly $405 billion (about 2.2 percent) less than what the economy was capable of supplying (potential GDP). This output gap, which is manifested in excess unemployment 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 0.7 percent annual rate in the fourth quarter of 2015 and was 1.8 percent higher than in the same quarter a year ago.  That is less 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 2016 Economic and Budget Outlook, CBO revised down its estimates for the level of potential GDP, which is projected to grow at an average annual rate of 2.1 percent from 2016 to 2026. Growth faster than that is necessary to close the output gap further. The faster actual GDP grows, the faster the output gap will be eliminated and full employment restored.

 

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 3.5 percent (4.9 million) higher in January 2016 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 222,000 a month over the past 12 months.  That pace is well above what’s required to bring down unemployment and will begin to slow as labor market health continues to improve.

(As it does every year in February, the Bureau of Labor Statistics released new historical estimates of payroll employment.  These estimates reflect an annual “benchmark” process in which estimated payroll employment in March 2015, derived from the monthly survey of employers, is replaced by more complete data primarily from employers’ unemployment insurance records.  This process lowered March 2015 payroll employment by 206,000 and changed estimates from April 2014 forward.  BLS also introduced new seasonal adjustment factors for data from January 2011 forward.)

 

The Unemployment Rate Rose to Near Its Postwar High...

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 edge up in 2014 as labor force participation stabilized while unemployment continued to fall.  It edged up further in 2015 due to falling unemployment, as labor force participation remained near lows last reached in the 1970s.

 

...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 "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 edge up in 2014 as labor force participation stabilized while unemployment continued to fall.  It edged up further in 2015 due to falling unemployment, as labor force participation remained near lows last reached in the 1970s.

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 last June. That rate has changed little since and was 1.3 percent in January.  Over a quarter (26.9 percent) of the 7.8 million people who were unemployed — 2.1 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 January 2016, this rate was 9.9 percent.

Growth in Workers’ Earnings Has Been Modest

Average hourly earnings of employees on private payrolls have been growing modestly throughout the recovery, averaging about 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 about 0.9 percent per year since the end of the recession and the cost of a typical worker’s market basket has risen about 1.7 percent a year over the same period.

In January, average hourly earnings of all employees on private payrolls were 2.5 percent higher than a year earlier.  With inflation temporarily very low, that represents a significant real wage gain; faster nominal wage growth will be required to maintain such gains if inflation begins to rise.

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 has room to fall further in an improving labor market (it was close to 1 to 1 just before the 2001 recession).  In December 2015, 7.9 million workers were unemployed, compared with 5.6 million job openings (a ratio of 14 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.

 

 

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