NCPA - National Center for Policy Analysis

As Bounce-Backs Go It's All Relative

October 4, 2010

Although the current U.S. economic recovery is not as strong as those of the 1970s, on many metrics its first year anniversary has proven stronger than either of the last two recoveries during the previous 25 years, says Jim Paulsen, a chief investment strategist at Wells Capital Management.

  • Real gross domestic product (GDP) growth in the first year of this recovery was 3 percent compared with only 2.6 percent in 1991 and 1.9 percent in 2001.
  • Persistent private job creation took 12 months once the recession ended in the early 1990s and 21 months after the 2001 recession; this recovery began producing persistent private job gains only six months after the recession ended.
  • Moreover, while 205,000 jobs were lost in the first 14 months of this recovery, 220,000 and 935,000 jobs, respectively, had been lost at this point in the 1991 and 2001 recoveries.

Whatever has been holding back growth has been present for 25 years.  That is, the "new normal" economy officials are fretting over is actually a quarter century old, says Paulsen.

The slower pace of economic growth evident during the last quarter century is more likely the result of a downshift since the mid-1980s in the growth of the U.S. labor force.

  • U.S. labor force growth slowed noticeably in the past 25 years compared with its growth rate between 1960 and 1985.
  • For example, in the 1970s, the labor force grew at 2.7 percent annually, while in the past 10 years it has only grown at 0.7 percent.
  • This radically altered the inherent speed of economic growth -- in the 25 years prior to 1985, annual real GDP growth exceeded 4 percent 52 percent of the time, whereas since 1985, it has surpassed 4 percent growth only 29 percent of the time.

Officials may want to consider that perhaps the current recovery is less a new normal than simply just "normal."

Source: Jim Paulsen, "As Bounce-Backs Go It's All Relative," Financial Times, September 29, 2010.

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