The Meaning of the Jobs Report

My colleague Gary Burtless has laid out the essentials of the jobs report very well, so I will make a different point. To oversimplify, there are two competing views of the economy. The first view builds on the historical fact that deep recessions are typically followed by strong recoveries. This was even true to some extent in the Great Depression, but certainly it applies to all of the postwar business cycle recoveries. Many of the econometric forecasting models draw on this history and some have predicted solid growth for the remainder of 2009 and even stronger growth in 2010. The optimists can also point to the stabilization of Wall Street banks, the rise in equity markets, the ongoing impact of low interest rates and the fiscal stimulus package.

The second view says that this recession is different from prior recessions and there will be a slow and weak recovery, and possibly a second downturn if growth stalls out in 2010. To support this view, one can point to continued weaknesses in the banking sector as many regional and local banks are expected to fail in the next year or so; weakness in the commercial real estate sector; and the likelihood that consumer spending will be sluggish, given the loss of household wealth and concerns about high unemployment. 

In addition, the world-wide history of financial crises is that it generally takes a long time to recover from them. These two views have very different implications for employment. GDP growth will have to be 3 percent or better if the unemployment rate is to come down significantly, so the first view suggests a reasonable recovery of the labor market in 2010 while the alternative view suggests unemployment will stay close to 10 percent for some time.

Which is correct? I have leaned towards the more pessimistic view, with sluggish growth in 2010, and Ben Bernanke’s recent testimony was similarly cautious. But no one knows the answer with any confidence. The latest jobs report was much better than expected and hence increases the chances that a strong or at least solid recovery is underway, but it is too early to be sure. Another few months of good reports are needed before optimism carries the day.