Sure, companies are hiring workers, but not at the rate typically following recessions in the post-World War II era. How much should we be worried about jobs and consumer spending?
US consumers appear to be on the verge of stalling out. One could reasonably argue that this is the result of protracted weakness in hiring. As I have mentioned in the past, we have the new norm, the “jobless recovery.”
Not surprisingly, we see evidence that the relatively weak labor market has kept wage growth subdued. According to the BEA, real disposable income (after-tax income adjusted for inflation) was effectively flat for the first four months of the year. After posting stunning growth of 0.4% in February, real personal spending grew at the anemic pace of 0.1% in March and April.
To put this into better perspective, consider how GDP and Consumer Spending have both grown over the last year (real, seasonally adjusted annual rates – SAAR):
This leads us to the question of how does this compare with previous recoveries?
I like to look at things from an historical perspective. So, I downloaded the quarterly real SAAR growth rates for GDP and personal spending from the BEA going back to the second quarter of 1947. First, I took the averages of those numbers. Then I focused on the recession periods, as defined by the NBER, and took the averages of those periods. Next, using BLS statistics, I focused on the quarters where the economy lost jobs during the recessions and I included each quarter until the economy was net-positive for jobs. I took the averages for those periods, as well.
Are there issues with this approach? Certainly. However, I’m looking for a general guide at this point, and this will serve that end.
From the second quarter of 1947 through the first quarter of 2011, quarterly real GDP grew at an average (annualized) pace of 3.30%. During that same period, quarterly real personal spending (Personal Consumption Expenditures – PCE) grew a touch faster, averaging SAAR growth of 3.43%.
Something happened with the 1990-91 recession: The economy took longer than expected to make up the lost jobs. Some structural change occurred between the 1981-2 recession and the 1990-91 recession, but we’re not sure exactly when. Because of that, I am going to use the recession in the early 1990s as the break-point.
(It is worth mentioning that the early 1980s saw the onset of the “Great Moderation” – that moderation in output and inflation volatility – in the US. Some have investigated the relationship between jobless recoveries and the Great Moderation. For example, see Jason Faberman’s report "Job Flows, Jobless Recoveries, and the Great Moderation”. For all of the applause that central banks received in contributing to the decline in output and inflation volatility, wouldn’t it be ironic if it was, indeed, those same dynamics that cause the employment sector to take so long to recover?)
As we see in the table below, from the second quarter of 1947 up to the start of the 1990 recession, quarterly real GDP growth averaged 3.66%, driven by the consumer, where growth averaged 3.72%. From the start of the 1990 recession to the first quarter of 2011, quarterly GDP growth averaged only 2.53%; personal spending grew 2.84%.
We see that growth (for both overall GDP and PCE) has been, on average, slower since the early 1990s, than it was for the previous 40+ years. Although it would be nice to believe that the slower growth of late stemmed from a greater percentage of the period in recession, this would be somewhat inaccurate. In the period before the 1990 recession, the US economy was in recession in 38 out of 173 quarters (approximately 22%). By comparison, since the onset of the 1990 recession until the first quarter of 2011, the US was in recession in 14 out of 83 quarters (about 17%).
|Q2-47 : Q1-11||3.30||3.43|
|Q2-47 : Q2-90||3.66||3.72|
|Q3-90 : Q1-11||2.53||2.84|
|Avg during recession Q2-47 : Q2-90||-1.31||0.98|
|Avg during recovery Q2-47 : Q2-90||8.49||6.88|
|Avg during recession Q3-90 : Q1-11||-1.11||0.25|
|Avg during recovery Q3-90 : Q1-11||2.94||2.78|
|Avg during recent recession||-1.94||
|Avg during recent recovery (thus far)||2.79||2.23|
If we focus just on the recessions for a moment, we see that, on average, the recessions before 1990 saw a greater hit to GDP growth, than those recessions since. Yet, personal spending held up better during the earlier periods.
What about during the recovery phase? Since we’re focusing on jobs and personal spending, we measure the recovery as the period from the time the recession officially ends until the economy gains back all the jobs it lost during the recession.
On average, personal spending has outpaced GDP growth. Even during a recession, we continue to see such a relationship. During the recovery phase, though, we find that GDP growth is faster than the increase in consumption. And, we see that personal spending during these jobless recoveries averages less than half of what it does during “regular” recoveries.
What does this tell us about how worried we should be about the recent activity in consumer spending?
Relative to the pre-1990-recession days, one might be concerned, as we would expect to see a strong, upward march in consumer activity. Since the 1990 recession, though, we have experienced a slower rebound. Thus, given the “lag” in consumer spending during a recovery, the recent activity, unto itself, should not be overly worrisome, as the growth rates for both GDP and PCE are slightly below the averages.
So, we see a slow recovery. It’s not a big deal. Right?
Unfortunately, there are other factors that weigh heavily. This is where the concern rises.
Housing has historically been a large part of recessions and, more importantly for today, recoveries. For example, before the 1990-recession, residential investment spending climbed, on average, more than 33%.
Since the 1990-recession, though, housing has been going a bit slower, but still substantial. During the recovery to the 1990 recession, residential investment spending averaged about 11.5%. In the recovery to the 2001 recession, residential investment spending climbed at an annual rate of about 8.5%, on average per quarter.
Where this story becomes somewhat disheartening is with the current recovery, where residential investment spending has declined 0.59%, on average per quarter. And we know that the housing market is still going through a tough time, and will likely continue to languish for a while, especially given the lackluster pace of hiring. It is for this reason that we need to be more concerned about the activity of the US consumer. As I mentioned in Direction of Growth, the key question facing policymakers is not just how to sustain an economic recovery, but how to enhance the recovery so that it produces enough jobs.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.