The Recession Analysis I Haven’t Seen, Or Why We May be About to Make Economic History

Opinion pieces and speeches by EPI staff and associates.

[THIS PIECE ORIGINALLY APPEARED IN THE TPM CAFE BLOG ON DECEMBER 2, 2007.]

The media has been brimming with recession analyses, but as far as I’ve seen, it’s all been from the perspective of financial markets. The central question of these articles is what impact a downturn might have on the markets. What’s missing, of course, is an analysis of the impact of recession on those of us who depend on paychecks, not stock portfolios.

That’s a huge oversight, because this may be the first business cycle wherein the typical family’s real income fails to regain its prior peak.

First, a little background. While the question of whether a recession will occur—or is already underway—is compelling, it’s important to recognize that from a living standards perspective, there’s not a lot of difference between an economy that’s growing at a 0.5% pace and one that’s contracting at -0.5% (current forecasts for growth this quarter range from about 0.5% to 1.5%). Most commentators will tell you that if 0.5% is the trough, we’ll have dodged a bullet, but it just ain’t so. Recession or not, when the economy grows too slowly, employment growth slows, unemployment rises, and real wages and incomes take a hit.

Here's where we stumble on an extremely telling possibility, one we’ll miss if we focus solely on the Dow: this could be the first recovery on record wherein the real (inflation-adjusted) median family income fails to regain the ground it lost since the last business-cycle peak in 2000.

The chain of events in a slowdown is consumers and/or investors stop spending, the macro-economy slows or contracts, and employers react to the diminished demand for the goods and services they produce by laying workers off, cutting their hours, and shelving hiring plans. The weakening job market will lead to lower wages, true, but the real damage to the income of working families comes from the disappearance of work.

That why median income—the 50th percentile, right in the middle of the income scale—almost always declines in recessions. In the last two downturns, this middle-class metric fell not only in the relatively short recessions, but in the initially weak recoveries that followed. Though the early 1990s recession ended in 1991, it wasn’t until 1996 that the real median family income recovered.

In the second half of the 1990s, it grew solidly, at 2.2% per year, as uniquely tight job markets helped to ensure that the benefits of faster productivity flowed broadly to the middle class. In the current recovery, productivity growth has been even faster, yet real family income fell through 2004, and has since crept along at less than one percent per year.

As of 2006, the most recent data, the typical family’s income remained 1.7%, or about $1,000, below its 2000 peak. We might make that up this year, though the presence of faster inflation and slower job growth as the year winds down make it a tougher call. But in a recovery as productivity rich as this one has been, simply regaining the prior peak is an absurdly low bar.

The fact that real middle-class income may barely make it back to its 2000 peak stands as the strongest indictment against the current American economy. It’s partly due to the fact that this recovery began with the longest jobless period on record, but the forces of inequality are the main driver of this unfortunate outcome. Globalization, YOYO economics,[PDF] and the absence of worker bargaining power have interacted to steer the lion’s share of the economy’s growth to a narrow sliver at the top of the wealth scale.

Economic elites may scratch their heads over poll results like the fact that almost half of us thought we were already in recession months ago. The business press will continue their vigilant recession watch, scrutinizing forecasts to see where the stock market is headed.

But if we are truly in a slowdown, this may be as good as it gets for middle-class families in the highly-touted, much celebrated business cycle of the 2000s. If so, it will be like the 1990s without the good part—the part where prosperity was broadly shared for a few years before the bubble burst.

This lack of shared prosperity is the signature characteristic of today’s economy. Any politician who isn’t taking about what he or she intends to do about it isn’t worth listening to.

Read comments for this blog entry in the original post on TPM Cafe.

[THIS PIECE ORIGINALLY APPEARED IN THE TPM CAFE BLOG ON DECEMBER 2, 2007.]