“Never reason from the previous peak”

In “The current state of the US economy explained in one chart”, Mark Perry shows this chart:

Never reason from the previous peak_1

And asserts, inter alia, that:

2. While the US economy was able to achieve a complete recovery from the Great Recession (in terms of real GDP), and is now producing $843 billion more output than in Q4 2007, the new record level of economic output in the US is being produced with two million fewer workers than in the last quarter of 2007 (see red line in chart).

4. The chart above also illustrates the fact that the US economy is in another “jobless recovery,” with a full economic recovery when measured by real output, but with a weak recovery when measured by employment levels, with a stubbornly high jobless rate and sluggish job growth.

As I argued in “The previous peak is not the appropriate benchmark” (Parts 1 & 2), just because you´ve reached or surpassed the previous peak does not mean you have achieved a complete or full recovery.

The chart below indicates that the economy is far below it´s “potential” level (even if you reduce the level of potential and it´s growth rate after 2009).

Never reason from the previous peak_2

It appears that the recovery is far from complete. The fact that fewer workers are producing more output than at the 2007 peak is also no mystery. Take a look at how much higher the productivity level is!

Never reason from the previous peak_3

The next chart indicates that the level of employment is related to the level of nominal spending (NGDP). Employment has been slowly rising since the recovery began in mid-2009 because the NGDP gap is slowly narrowing. You wouldn´t see a rise in employment if the “original” gap were still valid. The recession has reduced both the level of spending and it´s trend growth rate. You could charge this to hysteresis effects, but mostly it´s due to the persistent tightness of monetary policy, that allowed NGDP to drop so far below trend.

Never reason from the previous peak_4

3 thoughts on ““Never reason from the previous peak”

  1. I’d recommend 15-64 employment ratio as a better jobs metric than absolute employment figures. For one thing, there are more working age people today than there were 6 years ago.

  2. Pingback: Economic Recovery: “Never reason from the previous peak” - The Corner The Corner

  3. Pingback: Links…. | Depth Dynamics

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