Believe it or not, the fact that the country’s unemployment rate hit 9.5 percent in June might be a sign that economic recovery is on the way. This is surely hard to see for the millions of Americans looking for work. But despite claims that the economy is in worse shape than expected, a look at labor statistics shows there are several indicators that the recession may be ending. A second stimulus would reverse that trend.
It is becoming clear that the political promises of stimulating the economy and creating or saving millions of jobs haven’t been kept. Flames of discontent with the slow-moving stimulus have provoked a range of responses. Vice President Joe Biden has asked the nation to be patient and wait for the stimulus to work. The New York Times economist Paul Krugman is demanding a second stimulus. But all of these solutions are predicated on the belief that the economy is continuing to slide into dismal decay.
There is no doubt that the nation is still reeling from the shocks of the deepest recession since the Great Depression. Since the recession began in December 2007, 7.2 million jobs have been lost. And trillions in spending hasn’t done much to help thus far. In fact, most of the recovery we are starting to see probably won’t be sustainable since it is only supported by the government. A majority of the so-called stimulus spending has just been used to fill holes in state budgets and postpone the day when state legislatures have to make meaningful cuts to their bloated spending. It hasn’t put people to work.
The lack of transparency makes it hard to nail down exactly how much stimulus money has been spent so far. The Wall Street Journal suggests that about $78 billion of the $787 billion package is out the door. The privately tabulated Recovery.org estimates that $65.22 billion has been distributed to projects in all 50 states. The government website established to answer this very question only reports $56.3 billion paid out.
No matter what the actual number is, it is generally agreed the spending has been slow. This has been blamed for the sharp rise in overall unemployment since the Recovery Act passed. In February 2009, 12.5 million people were without jobs, with an overall 8.1 percent unemployment rate. Despite the promise that 3.5 million jobs would be created or saved in the course of two years, the increase to 9.5 percent unemployment has left an additional 2.2 million Americans jobless.
If the measure of success for the stimulus is jobs-as all the Obama administration’s rhetoric would lead you to believe-then the 14.7 million people without jobs in June would mark it as a failure thus far. Hence the calls by Krugman and others for a second stimulus package.
Japan faced this same choice in the 1990s when faced with its Lost Decade recession. When the first 10.7 trillion yen stimulus package didn’t save the economy in 1992, they tried two more stimulus packages in 1993 that together spent 19.2 trillion yen. Over the course of the Lost Decade, the Japanese government would try seven different stimulus packages, all failing to turn the economy around and instead doubling unemployment.
The reality is that the U.S. doesn’t need a second stimulus package. Vice President Biden is right that people should be patient. In a speech at the Commonwealth Club of California on June 30, Federal Reserve Bank of San Francisco President Janet Yellen announced that she expects the recession to end later in 2009. “Financial markets are in much better shape today than we ever would have dreamed six months ago,” she said “Investors have gone from disregarding risk, to being paralyzed by it, to once again being willing to take on a reasonable bit. The stock market has rallied and investor appetite for corporate bonds and other assets has rebounded, restoring access to capital for healthy companies.”
At this point the question is will any recovery starting to build dip down again once government supports run out. Propping up the economy even further with more stimulus spending would just make that situation more likely.
A few days after Yellen’s speech, Christopher Rupkey, chief financial economist for Bank of Tokyo-Mitsubishi UFJ, wrote that the suggestion that economy will soon rebound strongly is “maybe not as far-fetched as you think.” He pointed out that consumers and businesses have postponed purchases for six months, and that this savings is likely to have a very positive impact on the economy in the second half of 2009.
There are other positive signs in the economy that give this optimism credibility. While unemployment did increase to 9.5 percent in June, it was a markedly slowed rate of increase from the previous months, growing just a tenth of a point after increases of .4 to .6 percent in 10 of the past 12 months. The Dow Jones Industrial Average and S&P 500 Index have surged 23 percent and 26 percent respectively from their lows in March. And although it topped off in June, consumer confidence has been on the rise for the entire year.
A more significant indicator that the recession is ending can be found by locating the peak of weekly claims for unemployment benefits. Historically, the overall rate of unemployment is not a guaranteed indicator for when a recession is ending or progressing. The dot-com bubble recession ended in November 2001, even though the overall unemployment rate continued rising into 2003. However, the weekly average of individuals filing as unemployed began to dip in October 2001, before the recession ended.
Northwestern University Economics Professor Robert J. Gordon, a member of the National Bureau of Economic Research-the group that determines when a recession begins and ends-found that as far back at the 1960s, the four-week average of new applications for unemployment benefits reached its highest point about a month before the recession technically ended. If the same holds true for the current economy, then recovery may well have started months ago. According to the Bureau of Labor Statistics, the weekly total of new applications for unemployment benefits has been declining steadily since the end of March.
While 647,000 jobs were lost in March, only 467,000 were lost in June. The overall unemployment rate rising to 9.5 percent in June is due to an increase in the number of long-term unemployed workers. The average number of weeks a worker will be unemployed has risen from 20 to 25 during 2009. And while the total number of weeks a worker is unemployed has increased, the total number of claims is decreasing (see chart below). This shows that the workforce is stabilizing, and that the recession is bottoming out. Employers are beginning to maintain a steady number of workers, which sends signals to the market that we are moving towards recovery.
Source: Bureau of Labor Statistics
Even with these statistics, it is possible that the overall rate of unemployment may continue to rise through the end of the year, as employers take time to adjust to the end of the recession. It won’t be clear for months whether recovery has technically begun. The National Bureau of Economic Research didn’t officially determine the start of this recession until December 2008, a full year after its actual beginning. Given the depth of this recession, the recovery process is also likely to take some time.
But there are definitely positive signs that the recession is coming to an end. The government should wind down its programs and let the economy recover organically. The last thing the market needs is another stimulus bill that increases financial concerns about the massive national debt and deficit and feeds pork to special interest groups. The best thing the federal government can do is keep the national wallet closed.
Anthony Randazzo is a policy analyst at Reason Foundation. He recently authored the Taxpayer’s Guide to the Stimulus and a policy brief on Japan’s “Lost Decade.”