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According to the National Bureau of Economic Research (NBER) business cycle dating committee, the trough of the Great Recession occurred in June 2009, 18 months after the recession began in December 2007 – making it the longest of any recession since World War II. Given the “official” end of the recession in 2009, the economy should have been in recovery for the past two years. If only we were so lucky. For many Americans the recession is far from over.
“The Administration needs to do a better job of reducing uncertainties facing businesses and consumers by providing more clarity in policies going forward.” – Aparna Mathur
Let’s look at the broadest indicator of economic activity, the real GDP growth rate. While the Federal Reserve has been predicting annualized rates of growth of approximately 2.7 percent to 3.3 percent for 2011, the latest data from the Bureau of Economic Analysis shows that in the second quarter of 2011, real GDP grew at an annual rate of 1.3 percent. Disturbingly, first quarter growth was revised down to 0.4 percent from an earlier estimate of 1.9 percent.
Manufacturing activity also hit a bump in July, falling to a much slower rate of growth than in the previous month, according to the Institute of Supply Management. Market participants are worried that this could indicate a slump in global manufacturing and a wider economic downturn. Construction activity and the housing sector have not yet gained steam.
It is not surprising that these lackluster results have translated into an “employment recession”, if not an economic recession. Consumer sentiment, as seen in the University of Michigan’s index fell to more than a two-year low in mid-July, the lowest point since the first quarter of 2009 when the economy was in a recession.
Consumers are unwilling to spend, and the lack of domestic demand combined with the uncertainty over the economy has further curtailed business investment and hiring by American corporations. While GDP growth rates have been sustained somewhat by continued increases in exports and federal government spending, this has not translated into sustained jobs growth. The chart accompanying this piece, shows month-on-month employment growth rates from the start of the recession in December 2007 to the current period. The GDP growth rates over this period are included as a point of comparison.
While the economic recession, dated by the NBER, officially ended in June 2009 (the red line), the “employment recession” has continued. Employment growth remained negative between June 2009 and the first quarter of 2010. Excluding a couple of months in the summer of 2010, employment growth has been negative or close to zero for all other months. The July numbers seem to offer a glimmer of hope. But given the U.S. debt downgrade by S&P and the recent turmoil in global and U.S. stock markets, it is likely to be little less than an aberrant blip. While employment typically lags an economic recovery, as happened following the 2001 recession, it is troubling that even two years after the end of the recession, the labor market is still struggling to find a footing.
Tackling the jobs situation has to be the biggest priority for the government right now. Yet, while the debt ceiling deal may go some way towards reducing the uncertainties about the economy for businesses, there is little clarity about the details.
Firms are still unsure about the type of tax reform and the areas reserved for spending cuts that may be negotiated as part of the deal. Investors remain worried about the impact of the U.S. credit downgrade and the possibility of further downgrades despite the debt ceiling being raised. The Administration has also imposed enormous costs on the economy through a series of new regulations, such as the Dodd-Frank bill which affects financial firms and the Patient Protection and Affordable Care Act, best known as Obamacare.
Clearly, the Administration needs to do a better job of reducing uncertainties facing businesses and consumers by providing more clarity in policies going forward. Based on research done with colleagues at the American Enterprise Institute (AEI), it is my belief that lowering the corporate tax rate might yield double dividends at this time.
Today, the U.S. has one of the highest corporate tax rates in the developed world, and yet collects some of the lowest corporate tax revenues (as a share of GDP). A reduction in the corporate tax rate would cause an increase in capital flows and investment in the U.S., as well as higher worker productivity and higher wages for workers – resulting in higher corporate tax revenues which in turn would benefit the economy.
In addition, higher incomes in the hands of workers could act to increase domestic spending and help firms expand and hire more. This would start a true cycle of economic recovery.
President Obama congratulated his Administration on having taken the right steps early on when the recession officially ended in 2009. But two years on, his cheers ring hollow. Only through the reform of the U.S.’s corporate tax system, the reduction of onerous regulations and of the uncertainties facing businesses, will the U.S. have a sustained GDP and employment growth to make that proclamation become true.
Aparna Mathur is a resident scholar at AEI.
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