HOW GOOD IS THE CURRENT ECONOMIC RECOVERY?
By Isaac Shapiro, Richard Kogan, and Aviva Aron-Dine
Continued economic and employment growth has led to renewed debate over the nature of the current economic recovery. Some proponents of the 2001 and 2003 tax cuts have argued that the growth now occurring validates their claims that the tax cuts are “working” and having strong beneficial effects.
Examination of a broad range of key economic indicators, however, indicates that this economic recovery has not been especially robust. To the contrary, relative to economic recovery periods in the past, the current recovery has, on balance, been somewhat weaker than average.
Moreover, the economy’s performance over the past four and a half years has overall been no better than its performance in the early 1990s, in years following significant tax increases. Indeed, in terms of job creation, this recovery has been far worse than the comparable period of the 1990s recovery.
What the Data Show: The Key Findings
We examine Commerce Department, Labor Department, and Federal Reserve Board data on seven economic indicators: the Gross Domestic Product, personal consumption expenditures, private domestic fixed non-residential investment, net worth, income from wages and salaries, employment, and corporate profits. For each indicator, we look at average growth both since the economy hit bottom in November 2001 (i.e., since the recession ended and the current recovery began) and since the last business-cycle peak in March 2001. We compare average growth over these periods with the average growth that occurred over other comparable business cycle periods since the end of World War II.[1] (Growth is measured after adjusting for inflation, except for employment levels, where such an adjustment is inapplicable.)
For six of the seven indicators, the growth rate over the current period is below the average growth rate for the comparable periods of other post-World War II economic recoveries. Notably, during the current recovery, the economy has underperformed — that is, it has performed more poorly than the average for the other post World War II recoveries — with respect to both overall economic growth and growth in fixed non-residential investment. These two indicators should have captured any positive “growth effects” of the tax cuts.
The labor market also has been weaker during the current recovery. Both employment growth and wage and salary growth have been especially slow relative to the average for post-World War II recoveries; employment growth has been weaker than in any prior recovery period since the end of World War II. While the pace of job growth did pick up in 2004 and 2005, it has slowed in 2006. Even in 2004 and 2005, job growth was unexceptional by historical standards.
The current period has strongly outperformed the average post World War II recovery period in only one area: corporate profits, which have grown much more rapidly than average.
These conclusions hold whether one focuses on comparisons that examine the period since the recovery began or comparisons that examine the period since the last business-cycle peak (i.e., since the last expansion ended).
The Current Recovery Period
As noted above (and as shown in Table 1 on page six), we have examined the performance of these economic indicators in two ways: since the recovery began in November 2001 (that is, since the fourth quarter of 2001) and since the last economic peak (since the first quarter of 2001). This section focuses on the recovery period.
The Gross Domestic Product, consumption, net worth, non-residential investment, wages and salaries, and employment all have grown less rapidly than during other comparable recovery periods.[2] Labor market progress especially has been weak.[3] Employment has grown at an average annual rate of only 0.7 percent since November 2001, as compared with an average of 2.4 percent for the comparable periods of other post-World War II recoveries.[4] In addition, real wages and salaries have grown at a 2.0 percent average annual rate in the current recovery, as compared with a 3.6 percent average annual rate for the comparable periods of other post-World War II recoveries.
As compared with the first two years of the recovery, when total employment actually fell, employment growth has been stronger in recent years. But even in recent years, job growth has not matched that seen in the typical previous post-World War II recovery. Since the beginning of 2004, the economy has created an average of 187,000 jobs per month. If employment growth had occurred at its average rate for a post-World War II recovery, the economy would instead have created an average of 265,000 jobs per month, or almost one and a half times as many.[5]
Corporate profits have fared exceptionally well. The sole exception to the current period’s lackluster performance has been the growth of corporate profits. They have experienced average annual growth of 13.7 percent in the current recovery, as compared with average growth of 7.5 percent for other comparable post-war recovery periods.
An Uneven Recovery
Exceptionally rapid growth in corporate profits, coupled with exceptionally slow growth in wages and salaries, is consistent with other evidence showing that the distribution of the income gains the current recovery has produced has been very uneven. Congressional Budget Office data issued in December 2005 show that the long-term trend toward increased income inequality resumed in 2003 (the latest year for which these CBO data are available), as the stock market began to recover from its downturn. IRS data show that income concentration jumped even more dramatically in 2004, and Census data and other indicators suggest this pattern may well have continued into 2005 and 2006. While national income rose in those years, median income for non-elderly households, adjusted for inflation, fell in 2005. [6] In 2006, job growth has slowed, and average hourly wages, adjusted for inflation, have so far stagnated.
The Duration of the Current Recovery
One point in favor of the current recovery is its length. The current recovery is now longer than six of the nine previous post-World War II economic expansions. Even taking its duration into account, however, the current recovery is far from a standout.
Our analysis of economic indicators compares economic performance in this recovery with average economic performance for all previous post-World War II recoveries, including those that were shorter than the current recovery. This means we have compared the current economic expansion with past business-cycle periods of the same duration, some of which included the beginning of a second recession within that time period. This method of comparison confers an advantage on the current recovery: the current recovery should look better than other business-cycle periods that include a period of recession. Yet the current recovery still is weaker than average with respect to all indicators except corporate profits and net household worth.
If we compare the current recovery with just those three recoveries that lasted at least 17 quarters (the expansions of the 1960s, 1980s, and 1990s), we find the current recovery to be further below average with respect to GDP growth, consumption, investment, net worth, wages and salaries, and private-sector employment. It is above average only with respect to growth in corporate profits.
Comparisons Measuring from Economic Peaks
In the previous section of this analysis, we compared the current recovery with previous recoveries by measuring growth rates for various key economic indicators from the trough of the business cycle. Some may argue that this comparison disadvantages the current recovery because it followed a relatively mild recession. All else being equal, one would expect the economy to grow more quickly after a deep recession than after a shallow one.
To account for the possibility that starting from the trough skews the results, we also examined growth in the same indicators over the entire current business-cycle period — starting from the peak of the last business cycle in March 2001 — and compared it with growth over the comparable periods of all previous post-war business cycles. Using this approach does not change any of our central conclusions. Growth in the current period continues to fall short of the post-war average for all indicators except corporate profits and net worth (see Table 1). Growth in wages and salaries, private-sector employment, and investment continue to be weak in comparative terms. In fact, measured from the most recent business-cycle peak, the growth in wages and salaries during the current recovery not only is lower than the average rate of growth for comparable recovery periods since the end of World War II, but also is lower than the growth rate in every individual such recovery period.
Supporters of the tax cuts generally focus on a different set of statistics: growth rates measured over only the second half of the current recovery, during which the economy’s performance improved significantly. Such an approach is misleading. The fact that growth rates over the recovery as a whole remain below average indicates that the economy still has not caught up to where it would be if GDP, consumption, investment, wages and salaries, and employment had merely grown since the start of the recovery at the average rates for post-war recoveries.[7]
Comparisons to the Economic Cycle of the Early 1990s
Findings from a comparison of the current period with the business cycle of the early 1990s also are of note, since the comparable period of the 1990s recovery followed tax increases. This comparison yields a mixed picture. (The 1990s recovery continued for more than four more years after the period considered here; growth during the later part of the decade was considerably stronger than in the earlier years of the expansion that we examine here.)
The rate of GDP growth differs little between the current recovery and the comparable period of the 1990s recovery.
Net worth has grown slightly faster during the current recovery period, and corporate profits have increased much faster during the current period.
But the labor market has been significantly weaker during the current period. During the current recovery, job growth has occurred at half the pace it did during the comparable period of the 1990s recovery.
Fixed non-residential investment also has grown significantly more slowly during the current recovery. During the current period, it has grown at a 3.2 percent annual rate, well below the 6.7 percent annual rate at which it grew over the comparable portion of the early 1990s recovery. If tax cuts are good for long-term growth because they induce investment, as proponents argue, then they should have had a positive impact on non-residential investment (investment in the productive capital stock).
The Dismal Fiscal Consequences
These data suggest that the tax cuts of the past few years have not led to a shining economic performance. Even relative to the early 1990s, when taxes were increased significantly during the early stages of the recovery, the performance in the current period does not stand out.
But while the tax cuts do not appear to have delivered especially good outcomes for the economy, they have contributed to an exceptionally sharp deterioration in the fiscal outlook. Since the last economic peak, the budget has swung from a substantial surplus to a deficit equal to about 2 percent of GDP. The tax cuts account for a large share of this swing: their cost in 2006 is about equal to the projected 2006 budget deficit.
It is important to remember that these costly tax cuts, which are currently being financed by government borrowing, eventually must be paid for, whether through higher taxes or through reductions in government services. Thus, the true cost of the tax cuts has yet to be felt.
TABLE 1: Annual Growth Rate Comparisons
[see table on linked page]
(a) Average growth rate in 18 quarters after trough. Current recovery: 2001-IV:2006-II. 1990s: 1991-I:1995-III. Post-war average includes 1990s and 1949-IV:1954-II, 1954-II:1958-IV, 1958-II:1962-IV, 1961-I:1965-III, 1970-IV:1975-II, 1975-I:1979-III, 1980-III:1985-I, 1982-IV:1987-II.
(b) Average growth rate in 58 months after trough. Takes into account BLS's upward reestimate of March 2005-March 2006 job growth.
(c) Average growth rate in 21 quarters after peak. Current recovery: 2001-I:2006-II. 1990s: 1990-III:1995-IV. Post-war average includes 1990s and 1948-IV:1954-I, 1953-III:1958-IV, 1957-III:1962-IV, 1960-II:1965-III, 1969-IV:1976-I, 1973-IV:1979-I, 1980-I:1985-II, 1981-III:1986-IV.
(d) Average growth rate in 66 months after peak. Takes into account BLS's upward reestimate of March 2005-March 2006 job growth.
Post-war averages for net worth exclude the 1948 peak and 1949 trough due to lack of data.
Sources:
GDP, consumption, non-residential investment, wages and salaries, and corporate profits data: Bureau of Economic Analysis.
Employment data: Bureau of Labor Statistics.
Net worth data: Federal Reserve Board Statistical Release, Flow of Funds Accounts of the United States.
--------------------------------------------------------------------------------
End Notes:
[1] We take comparable periods to be periods of equal length as measured from the trough or peak of the business cycle, as identified by the National Bureau of Economic Research (the arbiter of the starting and ending points of business cycles). We generally look at data through the second quarter of 2006. Employment levels are available through September 2006.
[2] We examine fixed non-residential investment, as opposed to total gross domestic investment, in order to ensure that we capture growth of the productive capital stock rather than growth of inventories or housing construction. (The appreciation in the value of housing is reflected in the net worth data.) If tax cuts are good for long-term growth because they induce investment, as proponents argue, then the type of investment that should have increased is investment in the productive capital stock. (Note that even the growth in gross investment has been somewhat below average in this recovery, averaging 6.3 percent annually during the current recovery, as compared with a post-war average of 7.5 percent.)
[3] We did not examine changes in the unemployment rate here, as the current unemployment rate does not appear to be the best measure of the state of the labor market. The current low unemployment rate reflects, at least in part, unusually slow growth in the labor force. Our employment figures reflect job growth through September 2006, the 58th month of the recovery.
[4] In its October 6 data release, the Bureau of Labor Statistics announced that it plans to make an 810,000 job upward revision to the employment figures for the period from April 2005-March 2006 as a whole. Our calculations already take the revision into account.
[5] Some argue that private-sector, rather than total (i.e., private-sector plus public-sector), employment growth is more relevant to evaluating the claim that tax cuts stimulate the private economy. However, private-sector employment also has grown slowly, at an average rate of less than 1 percent in this recovery, compared with an average of 2.4 percent in the comparable periods of past post-war recoveries.
[6] For further discussion see Isaac Shapiro and Joel Friedman, “New CBO Data Indicate Growth in Long-Term Income Inequality Continues,” Center on Budget and Policy Priorities, January 29, 2006; Aviva Aron-Dine and Isaac Shapiro, “New Data Show Extraordinary Jump in Income Concentration in 2004,” Center on Budget and Policy Priorities, revised July 25, 2006; and “Poverty Remains Higher, and Median Income for Non-Elderly Is Lower, Than When Recession Hit Bottom,” Center on Budget and Policy Priorities, revised August 30, 2006.
[7] For a discussion of claims that the 2003 tax cuts were what “turned the recovery around,” see Aviva Aron-Dine and Joel Friedman, “The Capital Gains and Dividend Tax Cuts and the Economy: New Treasury Report Paints Misleading Picture,” Center on Budget and Policy Priorities, March 27, 2006.
cbpp.org |
