Kaza: Recession likely ended in June

The deep recession that began in November 2007 likely ended in June 2009, making it the longest recessionary period of post-World War II period and longer than the average length of recessions dating back to 1854.

Greg Kaza, economic researcher and executive director of the Arkansas Policy Foundation, recently provided The City Wire a memo noting that the improved data related to industrial production, income, sales and GDP suggests the recession ended in June.

ECONOMIC CYCLES
According to the National Bureau of Economic Research, there were 32 economic “cycles” (recessions or depressions) between 1854 and 2001, with the average recession/depression lasting 17 months. However, the U.S. post-World War II economy has seen only 10 cycles, with an average length of 10 months for each recession.

The NBER, the official marker of U.S. economic cycles, takes time to make a call. It was in a December 2008 statement that the group announced that this recession began in November 2007.

An example of the improving numbers is the recent U.S. Bureau of Economic Analysis report showing that real gross domestic purchases — purchases by U.S. residents of goods and services wherever produced — increased 3.5% in the third quarter of 2009. The domestic purchases was down 2.3% in the second quarter.

JOBLESS RECOVERY
Kaza understands those who may point to the growing unemployment problem or their own personal situation to question his call that the recession ended in June.

“The end of the recession does not imply that we’ve returned to normal economic conditions. It’s a recovery and will be weak at best,” Kaza noted, adding that he expects the recovery to be a “jobless recovery” for several fiscal quarters.

In a jobless recovery the economy is technically expanding but not at a fast enough pace to generate employment growth, Kaza explained. Kaza reminds that the NBER identified a recession between March and November 2001 but employment declined for another seven quarters before finally reaching a trough in August 2003. Monthly U.S. employment declined an average 691,333 (1Q 2009); 428,333 (2Q); and 225,666 (3Q).

What’s more, Kaza noted that the July 1990-March 1991 was also marked by a jobless recovery.

“Recovery periods following both those recessions were characterized by continuing job losses, so there is some precedent for what is happening right now in terms of a recovery with little or no job growth,” he said.

DOUBLE DIP?
Jeff Collins, an economist with Springdale-based Streetsmart Data and primary author of The Compass report, agrees with Kaza’s call on the end of the recession.

“The ‘end’ will certainly not feel like a blessing to many people. The recovery is likely to be slow, with a slight possibility of a double dip next year (beginning in Q2),” Collins noted in an e-mail interview. “Most importantly, the recovery will lack significant job creation. This implies unemployment will remain high probably late into next year (Q3 or Q4). There are a variety of looming issues that could derail growth including commercial real estate and further crisis in the financial sector.”

Noted Creighton University Economist Ernie Goss reported in his closely watched Business Conditions Index for October that economic recovery is underway and fragile.

“This month’s decline suggests that the economic recovery underway is going to be a disappointing one. In fact, the volatility and level of the overall index over the past several months, indicates that a double dip recession is a growing possibility. Downturns in farm income, in addition to legislative uncertainty in Washington, are having negative impacts on the regional economy,” Creighton University Economics Professor Ernie Goss said in this statement.

The Creighton Economic Forecasting Group has conducted the monthly survey of supply managers in nine states since 1994 to produce leading economic indicators of the Mid-America economy. States included in the survey are Arkansas, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Oklahoma and South Dakota.

Kaza said some economists, academicians and journalists may attempt to poke holes in the double dip recession scenario.

“They will say it was just a short break in a very long recession … but we don’t have that data to make that argument,” Kaza said, noting that a return to recessionary conditions will include a decline in industrial production and GDP.

“I’m not saying it will or won’t happen, but it’s something you have to be aware of,” he added.

RECESSIONARY JOB LOSSES
Arkansas and the Fort Smith metro area have seen big job losses since November 2007. Arkansas’ employment stood at 1.294 million in November 2007, a 2.2% decline from the 1.265 million as of October 2009. Also, the number of unemployed in Arkansas increased from 67,972 in November 2007 to 103,907 in October 2009 — a 52.8% increase.

In the Fort Smith area, the number of employed has dipped 1.5% from 132,967 in November 2007 to 130,956 in September 2009. The number of unemployed in the metro area has increased from 6,537 in November 2007 to 9,835 in September 2009, up 50.45%.

On employment, Kaza noted: “Arkansas private job creation peaked in February 2008, and faces significant regulatory uncertainty. Contraction of manufacturing, Arkansas’ third largest private industry sector, is a major factor behind the job losses. One in eight manufacturing jobs disappeared this recession. One in three have been lost since the postwar peak (1995).”

Fort Smith has suffered a 13.5% decline in manufacturing between November 2007 (25,800 jobs) and September 2009 (22,300). Arkansas has seen a 12.7% decline in manufacturing between November 2007 (186,400 jobs) and September 2009 (162,700).

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Below is the complete text of Kaza’s research memo.

(November 2009) Coincident indicators including industrial production, along with Gross National Product have expanded since June suggesting an end to the U.S. recession that started in December 2007. The recession’s duration—18 months—is the longest of the postwar era. The economy is in a jobless recovery, with monthly payroll employment continuing to contract, albeit at a slower pace.

Arkansas private job creation peaked in February 2008, and faces significant regulatory uncertainty. Contraction of Manufacturing, Arkansas’ third largest private industry sector, is a major factor behind the job losses. One in eight Manufacturing jobs disappeared this recession. One in three have been lost since the postwar peak (1995).

• Expansion of Coincident Indicators
Coincident indicators peak and bottom with cyclical turning points in the economy. Industrial production(1). reached an apparent trough in June, and has expanded for four consecutive months. Two other coincident indicators tracked by the Conference Board show a similar pattern. These are real income less transfer payments and manufacturing and trade sales.

• Contraction of Employment
The broadest coincident indicator — payroll employment — has continued to contract, with 2009-3Q losses at a smaller pace. A jobless recovery also occurred at the end of the last recession in 2001(2). In a jobless recovery the economy is technically expanding but not at a fast enough pace to generate employment growth.

• Expansion of Gross Domestic Product
U.S. GDP expanded 2.8 percent in 2009-3Q after contracting five of six preceding quarters (Bureau of Economic Analysis).

• Regulatory Arbitrage: Cap & Trade
Manufacturers, including those in Arkansas face an uncertain U.S. regulatory climate.  Some are arbitraging their production to offshore platforms, including Asian nations with less arbitrary policies.

Cap & Trade is the most prominent example.  Arkansas, a state in the region with a historically large Manufacturing workforce, is effected by regulatory arbitrage that is occurring as a result of the uncertainty surrounding this issue.

(1) Policy Foundation memos have emphasized industrial production (Federal Reserve), which measures the physical output of the nation’s factories, mines and utilities. See "Industrial Production Expands: Policy Foundation Sees Recession End In January 2002." (March 2002 research memo.

(2) Monthly U.S. employment declined an average 691,333 (1Q); 428,333 (2Q); and 225,666 (3Q) (Bureau of Labor Statistics). The NBER identified a recession between March and November 2001 but employment declined for another seven quarters before finally reaching a trough in August 2003.