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U.S. ECONOMY: ANOTHER JOBLESS RECOVERY?

Three of four economic indicators classified as coincident to the end of recessions and start of expansions by the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) reached a trough (bottomed-out) last year, suggesting the recession that started in March 2001 has already ended.

The three coincident indicators that reached a trough in 2001 are Personal Income Less Transfer Payments (October 2001, revised), Real Manufacturing-Wholesale & Retail Sales (September 2001) and Industrial Production (December 2001). For seven consecutive months in 2002 Industrial Production has grown suggesting the U.S. economy stopped contracting and started expanding in January or February.1

The fourth coincident indicator-nonfarm payroll employment-has registered gains for three consecutive months: May (+22,000); June (+66,000): and July (+6,000). These employment gains follow modest losses in March (-5,000) and April (-21,000). Total and private employment are higher than in February:

Political Implications

At first glance, the employment data suggests another so-called "jobless recovery," similar to the 1991-92. The term derives from modest nonfarm payroll gains in the period. During the 1992 presidential election supporters of Republican President George H.W. Bush and Democratic challenger William J. Clinton, the Arkansas governor, bitterly argued over the issue of whether the economy was in recession. President Bush and his supporters said the recession was over. Mr. Clinton and his campaign, rallying around the theme, 'It's the economy, stupid,' insisted it was in recession. President Bush won the economic argument after the November 1992 election when the NBER's Business Cycle Dating Committee concluded the recession ended in March 1991.2 Mr. Clinton won the political argument and the Presidency.

Is today's data analogous to 1992? The U.S. economy entered recession in July 1990 but by January 1992 three of the four coincident indicators had reached a trough: Real Manufacturing-Wholesale & Retail Sales (January 1991); Personal Income Less Transfer Payments (February 1991); and Industrial Production (March 1991). Nonfarm employment-the fourth indicator-declined in 1991 before reaching a trough in February 1992. Between March 1991 and February 1992 total U.S. employment fell by 253,000.

The biggest difference between today and the 1991-92 period is total U.S. nonfarm employment, which has been growing, albeit very slowly, as the following chart (U.S. Bureau of Labor Statistics) shows:

March 2001 132,461,000

February 2002 130,706,000

March 2002 130,701,000

April 2002 130,680,000

May 2002 130,702,000

June 2002 130,768,000

July 2002 130,774,000

Recessions End When Industrial Production Expands

Many economists are focused on the stock market as a measure of expansion. The stock market is important yet it is only one of 10 leading economic indicators (Conference Board). A broader, and more accurate measure of the real economy is Industrial Production,3 which has expanded for seven consecutive months in 2002.

Postwar, in 90 percent of recessions, Industrial Production stopped contracting prior to or in the month later declared by the NBER as the trough, one reason it is classified as a coincident indicator. The exception was the July 1981-November 1982 recession when Industrial Production stopped contracting a month later in December 1982. There has never been a period where industrial production expanded for seven consecutive months and the economy was in recession. Postwar, the longest period when Industrial Production expanded in recession was a mere two months: August and September 1949: May and June 1974; and August and September 1990 (the economy was in recession between November 1948 and October 1949; November 1973 and March 1975; and July 1990 and March 1991). Industrial Production's growth in 2002 is synonymous with the end of recession.

Motor Vehicle Gains Contribute To Industrial Production Growth

The output of only two durable goods components--motor vehicles and parts, and lumber and wood products--increased in 2001 while the economy was in recession. Spurred by zero-percent financing, motor vehicle production has also contributed to Industrial Production growth this year:

(April 2002) "The production of automotive products climbed 2.7 percent to its highest levels since August 1999 ..."

(June 2002) "A sharp increase in motor vehicle assemblies contributed significantly to the rise in the output of durables.

(July 2002) "A sizable increase for a second month in the output of automotive products was the principal contributor to the 2.5 percent rise in the index for consumer durables."4

Some economists have made a case for a "double-dip recession" similar to the 1980-82 period when two recessions occurred in three years. If a "double-dip" were to occur the evidence is likely to first appear where it did in mid-2000: an inverted yield curve; a decline in Industrial Production durable goods components; declines in manufacturers' new orders for non-defense capital (durable) goods; falling Institute for Supply Management (ISM) purchasing manager reports (Manufacturing); and nonfarm job losses in key Manufacturing components

The fact that three of four coincident indicators reached a trough last year suggests the U.S. recession that started in March 2001 has ended, and an expansion, albeit weak, started in early 2002.

--Greg Kaza

1. Arkansas Policy Foundation memo (March 2002), 'Industrial Production Expands: Policy Foundation Sees Recession End In January 2002'

2. The Business Cycle Dating Committee's decision was released in late December 1992. The 1992 N.Y. Times Index states, "Dating committee of National Bureau of Economic Research concludes that nation's ninth postwar recession ended in March 1991; has taken nearly two years to conclude that the downturn was already over by the time that they realized that a recession had even occurred."

3. The Federal Reserve System compiles the monthly Industrial Production index. It records the change in the production of U.S. factories, mines and utilities, and includes a measure of their industrial capacity, i.e., capacity utilization. Federal Reserve Statistical release G.17

4. Federal Reserve Statistical Release G.17