Economics for your Classroom Ed
Dolan’s Econ Blog When Will the Economy Recover? What is “Recovery,” Anyway? July 2, 2014 Terms of Use: These slides are provided under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishing.

When Will the Economy Recover?
Public Opinion  In June, 2014, a CNNMoney poll asked Americans when they thought the economy would recover  Only 3% thought it had already recovered  61% thought recovery would take 3 more years or longer  3% thought it would never recover  Are these views reasonable? How do they compare with those of professional economists? July 2, 2014 Ed Dolan’s Econ Blog

What is the Definition of
Recovery?  There is no universally accepted definition of “recovery” in business cycle terminology  Official sources use the term recession for any period when the economy is contracting and expansion for any period when it is growing  Economists and popular writers often use recovery to mean the early part of an expansion, when the economy is getting back to normal after a recession July 2, 2014 Ed Dolan’s Econ Blog The Business Cycle Dating Committee of the National Bureau of Economic Research officially defines the phases of the business cycle as follows: “A recession is a period between a peak and a trough, and an expansion is a period between a trough and a peak.” (Link to Committee website)

Previous Peak GDP as a
Benchmark for Recovery  One possible benchmark for “getting back to normal” is the previous peak of real GDP  If we use that benchmark, the recovery was completed in the second quarter of 2011  By the end of 2013, the economy had reached a level of real GDP 6 percent above the previous peak July 2, 2014 Ed Dolan’s Econ Blog

Potential Real GDP as a
Benchmark for Recovery  Instead, we could use potential real GDP as our benchmark for “back to normal”  The Congressional Budget Office defines potential real GDP as the level of output that is sustainable in the long run without causing excessive inflation  As this figure shows, at the rate the US economy has grown since the start of the recovery, it would never reach the CBO estimate of potential GDP July 2, 2014 Ed Dolan’s Econ Blog

Payroll Employment as a Benchmark
for Recovery  When many people speak of “recovery,” they think of the job market rather than GDP  If we use the previous peak of nonfarm payroll employment as a benchmark, the economy completed the recovery in May 2014  However, if we use the prerecession trend as a benchmark, the economy may never get back to “normal” July 2, 2014 Ed Dolan’s Econ Blog

Employment Ratio Benchmarks  Instead,
we could use employment ratios as our benchmarks  The unemployment rate is the ratio of unemployed workers to the labor force. As of mid-2014, it is well on its way to the pre-recession norm of about 5.5 percent  The employment population ratio is the ratio of employed workers to the adult population. It decreased sharply during the Great Recession and is unlikely ever to return to its prerecession norm, in part because of an aging population July 2, 2014 Ed Dolan’s Econ Blog

The Fed’s Dual Mandate as
a Benchmark for Recovery  The Fed has its own benchmark for recovery, based on its dual mandate to maintain full employment and stable prices  Its target for inflation is 2 percent per year as measured by the deflator for personal consumption expenditures  Its target for unemployment is 5.25 to 5.75 percent  The Fed expects to reach both of its targets by 2016 July 2, 2014 Ed Dolan’s Econ Blog The red crosshairs and circles show the Fed’s target of 5.5% unemployment and 2% inflation. The blue line shows actual performance since 2010. The green circles show forecasts for 2015 and 2016

The Bottom Line The answer
to the question of when the economy will recover depends on the benchmark we use  If we use the previous peak of GDP or payroll jobs, the economy has already recovered  If we use the unemployment rate or the Fed’s dual mandate, it will probably recover by 2015 or 2016  If we use potential real GDP or the employment population ratio, the economy may never recover July 2, 2014 Ed Dolan’s Econ Blog

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