If we measure recessions by unemployment, which seems to me a good way to measure them, it appears that since the 1990, recessions have become different phenomena than they were in the earlier post-WWII period. A graph recently posted by Calculated Risk shows that the recessions of the 1940s, '50s, '60s, '70s and '80s were relatively steep and short-lived. Employment recovered within about a year in each case. The recessions of 1990-91 and 2001, by contrast, featured more drawn out employment losses. The Great Recession of 2007-2009 continues unabated from an employment point of view, and it appears that it will be a number of years yet before employment levels recover.
The reasons for this change probably have to do with three factors:
One, the change from primarily a manufacturing economy, in which inventories played a material role in the business cycle, to a very mixed economy in which naturally cyclical factors play a smaller role.
Two, a change to a more financially oriented economy in which debt plays a far greater role in promoting economic activity.
And three, the increased globalization of work that gradually erodes the employment opportunities of the less skilled and less educated.
I believe that factor three is the most prevalent reason for the depth of the Great Recession, not the dearth of credit availability. Credit has been, indeed, less available than it was in 2006, but compared with 20 years earlier, credit standards appear to be similar today, except that in the housing sphere, government is providing credit on far looser standards than were available 20 years earlier.
As a consequence of technology and mobility, many people have become effectively unemployable in the global marketplace. The jobs they did have simply disappeared. As Gavin Davies recently observed, "This time, potential workers seem to have drifted away from the labor market, and not come back."
For this reason, I do not expect the U.S. economy to quickly enable the same portion of the population to have employment as 20 years ago. A resurgence in housing construction would help, but even that would not be likely to bring employment levels back to mid-1990s percentages. If I am right about that, then economic recovery this time around means something different from previous eras. It will be less about full employment and more about how society and the economy adjust to new realities.
Such adjustment appears to be taking place. Corporate earnings appear to be fairly robust despite the high rate of employment and higher rate of underemployment. America's global competitiveness appears to be improving, perhaps even as a consequence of the employment situation, as employees may work harder for lower wages. That is not necessarily good for the employees, but it can be good for investors.
As a small example, HURCO Companies (HURC), an Indianapolis-based machine tool manufacturer, reported earnings Friday morning. Its net earnings had doubled from the year-earlier quarter, based on a 29% increase in sales, permitting more efficient absorption of fixed plant and expenses. Sales increased both internationally and domestically. The company has a nice balance sheet and the continuing capacity to leverage sales gains into substantial gains in net income.
Little stories like this make me think that despite the continuing employment recession, this can be a good time to own common stocks.