As it becomes clearer that the employment picture moving forward isn’t going to look any rosier, one has to come face to face with something no one really wants to deal with during a recovery: a stagnant job base.
Usually, during economic expansion, hiring expands along the same lines as GDP. Not so much in our current recovery. Why? We never hit full employment. That means that, so long as companies continue their practice of not hiring, our potential GDP and our actual GDP are going to continue to be miles apart. What does that mean for you? It means you’re not going to see prices drop at the grocery store. It means you’re going to continue to have to pay close to $4.00 for gas. It means that until we have a business cycle that actually meets expectations, we’re going to have the same old problems.
You may be saying to yourself: ‘this isn’t anything new,” but actually it is. During the last three economic downturns, the saving and loan crisis in the ’80’s, the inflation-driven crisis in the early ’90’s and the housing crisis we saw a return to full employment when the market hit bottom. This hasn’t happened yet for the American economy after the financial crisis and this is a major cause for concern.
Yesterday, I talked about how we’re not manufacturing durable goods at the rate we were during the economic expansion in the ’90’s and how I believe that is a real cause for concern. Today we need to talk about the seven million jobs we’ve lost and the 2.5 million that have come back. In order to return to a state of economic functionality we need to gain back the jobs we lost and add jobs that would have normally been added during the period of recession in proportion to where jobs were when we entered the recession. The graph below demonstrates what needs to happen:
Finally, if the economy is “overheating”–nearing or surpassing full capacity–core inflation climbs to levels well above where it is now (in the interest of getting a cleaner read of price pressures, the core leaves out two volatile components: food and energy prices). It’s climbing off the floor, for sure, and that’s a good thing–shows there’s some life out there. But it’s well below capacity constraint levels.