2001 Was Atypical
There are two important reasons why the 2001 -03 era was atypical. Perhaps because the leading economics bloggers were less active during this time, none of them seem to have noted these facts.
- 2000 was an unprecedented peak in labor participation. Between the Y2K problems and the Internet startups there was tremendous demand for specialized workers. Even the COBOL programmers were pulled back into the market. Many companies chose to dodge the problem by buying new computers. This pulled demand forward and further increased employment. We will probably never again see such a peak in labor force participation.
- After 9/11 it was clear that the US was going to engage in war with Iran. There was a prolonged dance with the UN while we tried to build a coalition. It was a time of uncertainty. In reaction to this uncertainty, US companies delayed expansion and hiring. It was an easy choice. Why act when you could wait a few months and see how it would turn out? We watched this over and over in CEO interviews.
The result was that demand and hiring was pulled forward to 2000, creating an impossible high. When the recovery came, it was distorted by the altered computer cycle and also the delay for the start of the war.
This was an easy target for Democrats in 2004, so we got the term “jobless recovery.”
2009 Is Different
Most obviously, the 2009-10 recovery will not operate from a prior peak in labor force participation. There is plenty of room to get back to old levels. Also, there has been no pull forward in demand.
Just as importantly, there is unprecedented monetary and fiscal stimulus, just starting to hit. This is an important and significant difference.
No one knows exactly how this will play out. We have maintained that it is a challenge for any existing models, including the ECRI’s, for which we have the most respect. Quite frankly, we wonder if the ECRI model will accurately reflect the stimulus impact.
While employment always lags as companies squeeze more work out of an existing force, there is much more potential for a rebound. There is no a priori reason to expect a jobless recovery.
Meanwhile, corporate earnings from lean companies continue to surprise.
Originally published at A Dash of Insight and reproduced here with the author’s permission.
5 Responses to “The 2001 Recession is a Bad Example”
Logically reasoned and well said.Thank you.
Agree with your basic points, but would add a few comments:1. I’ve heard ECRI say that they don’t use any models in the common sense of the word, i.e., no econometric models that are “fitted.” This is a stark difference from most forecasters:http://www.ritholtz.com/blog/2009/07/synchronized-surge-strengthens-since-april/#comment-1960752. ECRI Long Leading Indicator peaked in early 2002, ahead of the subsequent decline in stock prices later that year:http://www.ritholtz.com/blog/2009/07/synchronized-surge-strengthens-since-april/#comment-1949713. ECRI recently said that most of the initial stimulus spending has yet to hit, so that it would be a reinforcement of the upturn in out quarters, but it not a key part of why they’re saying recovery starts this summer:http://www.reuters.com/article/economicNews/idUSN1740071220090717
Where will all this mythical employment come from that will avert a JOBLESS RECOVERY? Logically speaking then, when job levels AND INCOMES are much lower as a result from where does consumer spending arise?Replacing $18/hr jobs with $7/hr jobs may be considered recovery to the elite-WHO ARE YOU KIDDING? There won’t be any GIANT consumer push to start buying CHINESE goods, your retail volume will have shrunk with a number of fewer purveyors.Retail IS our economy now,it WON’T BE THERE!!!!PS You believe the stimulus will continue??? It is only PORK-you are aware of that(you SHOULD BE). PORK DOESN’T BUILD ANYTHING EXCEPT HIGHWAYS TO NOWHERE. You people are fools. Two faced especially, if you often argue that the NEW DEAL did no good. You are dishonest enough to claim that Obama PORK will be different???You Boys say Hi to Larry when next you see him!George HarterBaghdadontheHudson
How will US households, a significant proportion of which have negative equity in their homes, un- or under- employment (and cannot increase their debt because of that negative or reduced equity or reduced earnings situation) create the demand that was fed by increasing debt during the 2003 to 2007 period?How can the government sector which is about 1/3 the size of the private sector make up for a 16% fall in demand as private debt stops growing?
Confusing Irak with Iran is a Bad Mistake