The Commerce Department reported today that the economy grew by 3.5 percent in the third quarter of this year. This confirms, I think, that the recession is over. It was quite a severe one, but not significantly more so than the one we had in 1982.
Employment, as everyone knows, is a lagging indicator, so it’s unlikely we’ll see much improvement on this front for a while. How long that “while” turns out to be is the crucial question for those attempting to handicap the 2010 elections which will occur almost exactly a year from now.
We may well see some meaningful improvement in the employment numbers months before election day 2010. However, in speculating about how much improvement to expect, and how soon, it’s important to keep in mind that the 3.5 percent expansion reported by the Commerce Department was driven in part by the “cash for clunkers” program. Not only has that program expired, but some of the spending it induced may have come at the expense of spending that otherwise would have occurred in subsequent quarters.
On the other hand, there is still stimulus money to be spent and, most likely, still impact on employment yet to be experienced as the result of money already spent. Although the head of the Council of Economic Advisers has said the stimulus bill has likely done all it can on the jobs front, I read this more as spin designed to promote an argument that we need further stimulus legislation than as good faith economic analysis.
Finally, we should be mindful of John Steele Gordon’s point that employment has become more and more of a lagging indicator during the past two decades. The reason, according to Gordon, is the advent of technology that boosts worker productivity. This technology has two related effects on the employment situtation coming out of a recession. First, firms tend to invest more heavily in technology and less than before in new workers. Second, technology makes workers more productive, thus reducing the need for new hiring in the first place.
Gordon notes, for example, that following the 2000-2001 recession (a relatively mild one) the employment numbers didn’t turn around until 2003, after the Bush tax cuts were enacted. In that case, though, the economy had to deal with the jolt of 9/11.
Gordon believes that if the Democrats allow the Bush tax cuts to expire at the end of 2010, the recovery could remain “jobless” thereafter. Under almost any plausible 2010 electoral scenario, Obama can expect a very difficult time if the recovery is still “jobless” by then.
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