“Jobless” economic recovery may continue to be an issue, according to IU forecast

According to a new forecast by Indiana University economists, President George W. Bush may have to contend with a similar jobless recovery, although economic conditions are different from those affecting his father’s re-election.

“Following the 1991 recession, there was a lot of talk about the jobless recovery then, which in fact played a role in Clinton’s winning the election in 1992,” said Willard E. Witte, IU associate professor of economics and a director of the IU Center for Econometric Model Research. “Even though the recession of 1991 had been over for a year, the economy wasn’t generating jobs. Unemployment was still at pretty high levels.

“We’ve got the same thing this time, except that it’s not quite the same. For one thing, the unemployment rate hasn’t gotten anywhere near as high this time,” Witte said. National unemployment recently hit 6.4 percent, well below the 7.8 percent reached in 1992.

“That’s good compared to then, but on the other hand, in the 1990s, the jobless recovery lasted about a year after the end of the recession. After about 18 months, employment had recovered a lot of what it had lost,” he said. “Now, we’re 21 months past the end of the recession and employment is still falling, at least as measured by the payroll survey.”

The center is based in IU’s Kelley School of Business and has been making economic forecasts since 1982.

IU economists believe that the employment picture will start to turn around in the next couple of months. However, this will mean that it has taken two years for the economic recovery to include many out-of-work Americans and that it will take another year before employment rolls return to pre-recession levels.

“This whole episode, the recession and the aftermath, has been strange,” Witte said. “Typically, during a recession there have been policy restraints, and the sectors that ordinarily have been hit hardest by recessions have been construction and spending on durable goods, but that didn’t happen this time.”

Consumer consumption never went away. Mortgage refinancing and low-interest deals from the automakers were a boon for consumption, but not everyone was able to participate.

Monthly data continue to point to a strong third quarter. Real consumption expenditures rose 0.7 percent in July and 0.5 percent in August (monthly rates), with most spending being for durable goods. Auto sales were very strong, averaging an annual rate of 18 million.

In the labor market, unemployment in September held steady at 6.1 percent, while payroll employment increased by 57,000. This was the first positive move for employment since January.

“To be sure, these numbers are not a reason for wild enthusiasm,” Witte said. “Over the long run, the economy needs to increase employment at three or four times the September rate if unemployment is to be brought down significantly. At 6.1 percent, the current unemployment rate is still about one and half points above our estimate of its ‘full employment’ level. But employment gains are better than losses.”

Some may point with concern to a decline in consumer confidence in September, but the IU economists pointed out that it remains much higher than earlier in the year.

Between now and the end of the year, higher output accompanied by rising demand should lead to an increase in employment, which should result in greater consumer confidence. This may mean it’s not too early to suggest a more profitable holiday season for retailers, because of a better employment picture in the closing months of 2003.

The forecast projected that unemployment will fall to 5.4 percent by the end of 2004.

In Indiana, the proportion of manufacturing decline has been less than in the nation as a whole. Though Indiana’s blue-collar workforce has suffered, many of the state’s remaining manufacturers are productive and efficient.

“If the (U.S.) economy starts to recover as we think it will, we think the Indiana situation could start to look up,” he said. “I think we’re tracking the nation as a whole now, maybe even doing a little better than the nation as a whole over the last six months or so.

“The real key, both nationally and particularly for Indiana, to getting a recovery that has real staying power is having businesses starting to invest again,” he added. “Next year, we expect to see significantly higher levels of investment. If that works out, then I think the prospects for the Indiana economy would be improved.”