OLMIS

by Nick Beleiciks
Published Feb-1-2010

Recovery is the First Step The Jobs Will Follow (Eventually) Oregon's Economy Recovered, But Jobs Haven't Yet

Unemployment rates are near all-time highs, few industries are creating new jobs, and job vacancies are scarce, yet some economists have announced the end of the Great Recession. Welcome to the jobless recovery.

A jobless person will typically define recovery as when he or she returns to work after a period of being involuntarily out of a job. An economist will typically define recovery as the return to growth in economic activity after a period of decline. The two views of recovery coincided following the recessions of the 1970s and 1980s. Following the recessions of 1990-1991 and 2001 however, unemployment rates continued to rise for about two years after the official end of the recessions.

The situation where economic activity resumes growth without a corresponding growth in employment is called a "jobless" recovery. Many analysts feel that the term describes our current situation. Since the term may be used often to describe the economy over the next year or two, it's worth taking a closer look at this apparent economic oxymoron.

The business cycle is the ups and downs in the strength of the overall economy caused by the nature of how people and businesses consume and produce goods and services. When consumers buy fewer goods and services, businesses produce less and the business cycle is in the contraction phase. When consumers start buying more goods and services again, businesses produce more to meet the additional demand. The business cycle is then in the expansion phase and recovery begins. But knowing exactly where we are in the business cycle, and whether or not we are actually in recovery, can be complicated.

Most economists accept the national business cycle dates proposed by the National Bureau of Economic Research (NBER). The NBER is a private, nonprofit research organization that has a committee of economists who mark the start of each contraction (the peak of the business cycle) and the start of each expansion (the trough of the business cycle). The NBER considers a recession to be the contraction period between the peaks and the troughs of the business cycle. The group defines the period between the trough and the peak of the business cycle as economic expansion, but does not go so far as to label the expansion period as recovery.

The goal of the committee is to set accurate dates for the business cycle, so they take their time before making announcements. The committee sets the dates after evaluating trends across a range of economic indicators (Table 1). Some of the indicators are not available until months after the time period in question, and are subject to revision, so the NBER will wait six to 18 months after the recession ends before setting the date.

Only two of the seven indicators used by the NBER committee are direct measures of jobs. Monthly payroll employment is a widely reported measure of employment and monthly household employment is used to calculate the unemployment rate. The NBER can declare an end to the recession based on the strength of the other five indicators, even though employment is still weak. Some analysts feel that since gross domestic product (GDP) and income rose in the third quarter of 2009, the NBER will eventually declare that the recession ended sometime during the summer of 2009 even though job losses continued and the unemployment rate rose.

No matter the exact date of the end of the recession, it's clear that it must end before the economy can return to full employment. Businesses will not hire until demand for their goods and services picks up and more workers are needed to increase production.

As seen in Graph 1, this process can take a while. NBER recession dates are marked in the graph with dark vertical bars, while the current possible recovery is shown with light vertical bars.

Unemployment rates began falling immediately following the ends of the 1980 and 1981-1982 recessions. This happens in a traditional manufacturing economy where factories can issue temporary layoffs during lean times and quickly rehire workers when the economy picks up. Oregon's rate climbed between the recessions, partly because lumber and wood product manufacturers continued to cut jobs. It took about four years for Oregon's unemployment rate to drop back down to pre-recession levels.

Unemployment rates continued to rise for about two years after the end of the 1990-1991 and 2001 recessions. Both recoveries were described as jobless. Again it took about four years after the end of these recessions for Oregon's unemployment rate to return to its pre-recession level.

Some economists view jobless recoveries as a new normal brought about by broad changes in the labor market. The changes include a trend towards more permanent layoffs (rather than temporary layoffs) and the availability of temporary workers which can delay employers' hiring decisions. Employers also cut hours and issued work furloughs to help cut costs during the latest recession. They can initially increase hours and remove furloughs to boost production during this recovery, without the immediate need to hire additional workers.

The NBER does not set business cycle dates for individual states, so we do not have an equivalent way to mark recessions here in Oregon. However, economists at the Oregon Office of Economic Analysis (OEA) and the University of Oregon (UO) track separate composite indexes of Oregon's economic activity. Both the OEA's Oregon Index of Leading Indicators and the UO Index of Economic Indicators suggest that Oregon's recession has either recently ended or will end soon. By the economist's definition, it looks like the state is in the first step of economic recovery.

The employment situation has yet to see a recovery, but there is some good news in Oregon's job market. The rate of job loss has slowed, the unemployment rate has retreated from its initial spike, and average hours worked in manufacturing have picked up. All three events are necessary for the beginning of a jobs recovery. In addition, the latest forecast from the OEA shows job growth returning in spring of 2010. However, as recent recessions have shown, it could be a while before most job seekers feel like recovery is just around the corner.