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National Update

January 10, 2013

The economy is now nearly three and a half years past the official end of the recession and the recovery has been choppy at best. Ordinarily after such a deep and prolonged downturn the recovery would snap back with a burst of strong growth fed by a combination of fiscal and monetary stimulus, pent-up demand and low utilization rates. But this recession was different. Instead of the standard business cycle recession when the Fed hikes interest rates to moderate growth and head off inflation, this recession was precipitated by the bursting of an asset bubble in the housing market that put the US financial system in jeopardy and hobbled the economy. Recovery from this type of recession is notoriously slow as the damage from the bubble is dealt with. In this case the banking system has gone through a major upheaval and the household sector is nursing the wounds from inflated and collapsed housing wealth and a steep decline but recovering financial asset values. Economic growth over the period has also been restrained by a series of global events including the European sovereign debt crisis, an earthquake in Japan, political unrest in Middle Eastern oil producing countries, but also domestic political gridlock.

With the exception of a few quarters above 3 percent, real GDP growth has hovered closer to 2 percent for most of the post-recession period. We expect that growth will accelerate through 2013 and 2014, with a healthier banking system, an improving household sector based largely on the progress seen in the housing sector and the return of rising house prices, and continuing accommodative monetary policy. On the domestic policy front there has been incremental progress, settling (for now) the tax component of the fiscal cliff and postponing the spending cuts. The forecast assumes the remaining issues will be resolved in piecemeal fashion, providing drama but avoiding real damage to the economy, with the key issue being gradual spending cuts rather than sequestration. This has been our operating assumption since before the election, so the overall forecast is little changed based on the latest fiscal cliff developments.

Figure 1. Real GDP Growth

Accelerating economic output growth will lead to improvement in the labor market. The contraction in payroll employment was more substantial in this recession than in previous recessions, peaking at an average monthly rate of 758 thousand jobs lost in the first quarter of 2009. Payroll employment has been expanding consistently in 2011 and 2012 at an average rate near 150 thousand per month, but this pace is too slow to lower the unemployment rate in a meaningful way. The unemployment rate has come down from its peak, but this owes much to a contraction of the labor force. The labor force has recovered somewhat and recently surpassed its pre-recession peak, but is still 6 million workers below what the pre-recession growth trend implies. Future reductions in the unemployment rate will require enough job creation to absorb both new entrants to the labor force and returning workers. We expect the pace of payroll employment growth to accelerate, but the unemployment rate will decline only slowly, remaining above 7 percent at the end of 2014.

Figure 2. Payroll Employment Growth and the Unemployment Rate


For more information about this item, please contact Danushka Nanayakkara-Skillingt at 800-368-5242 x8691 or via email at

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