Sunday, August 10, 2008

What Recessions Look Like in the 21st Century

For those in the media who have been arguing about whether or not we're in a recession, I say the answer is "yes". Its not that I feel the economy is going to post of lower GDP growth numbers necessarily or that the job loss numbers are in for a huge revision downward making them look more like previous recessions, its that the definition of a recession needs changing for the 21st century.

The more this country moves away from manufacturing and into service, the more easily it is for companies to hire less in good times, instead relying on increased productivity of workers to pull through and fill the gap. When the cycle turns around having hired less means less jobs to shed. As some will remember the slogan "jobless recovery" back in 2004-2006, this was a key signal of our continuing switch from a manufacturing economy to an automated manufacturing and service economy.

Anecdotally, those working in the service economy are probably having harder times defining their job responsibilities - many listing more than 2 seemingly non-ovelerapping job responsibilities. This is productivity at work - you're working two jobs (it might even feel like it too) which is actually not a bad thing because most of these jobs and the skills the holder possesses are doubly important to the employer. Sleep better if your job description sounds complex, you've got higher switching costs!

Some would argue that its still possible to have huge job cuts in a service economy, and though I won't outright disagree (if a perfect storm of economic time-bombs go off at once), if the evidence they're referring to is the tech bust in 2000, they're ignoring the behavior of bubbles which by their nature will provoke this behavior when they unwind. The housing industry is shedding more jobs this recession, the financial services industry is shedding more jobs this recession - both of them bubble born.

If you look outside bubbles in sub-sectors, the increased productivity potential more typically found in highly developed economies is what has led to lack of boom-bust hiring practices. If we're in a global downturn, the real difference will become apparent when developing nations report their job growth numbers - China, India - their recessions will be swift on the downside and harder on labor markets.

All this being said it sounds like the new recessions will be better, right? Not necessarily. The labor market may be more stable, but its also less likely to show a huge rebound. Much like countries in Europe which have government protections on hiring and firing, corporations have established their own mechanism for reducing the hire-fire activity, acheiving much the same goal, but with higher productivity as a useful side-effect. So, look for many of the same problems regarding recessions seen in Europe to migrate here, slightly offset by our higher efficiency. This would be slower rebound growth, slower wage growth, and more general economic "malaise" as we muddle through with companies afraid to hire, instead eeking more out of workers and holding wages down.

So how does this insight cause me to revise my definition of a recession? I think the GDP number will be more stable, but less overall - therefore a recession shouldn't necessarily be viewed in absolute terms, but in relative strength. If high GDP growth is 2.5% and low is 0.1% a recession would be defined as on the bottom quartile of this range - 0.6% or below possibly. This along with throwing out our historical norms on job creation and loss will give us a much better idea of the strength of the economy. Instead of sharp downturns, recessions will be long and slow to form and abate giving us little insight into possible turn arounds in the economy.

Applying this to the current situation - don't expect a bombastic rebound, instead expect job loss numbers around net zero (30K+-) barring a return to manufacturing. Expect GDP numbers to climb slowly, and taking out foreign corporate earnings would also help.