Posted by: Josh Lehner | February 17, 2011

Strength of the (Net) Expansion

Included in the presentation at the release of the latest Oregon Economic and Revenue Forecast, was a discussion surrounding the strength of the expansion. The U.S. economy has been in recovery since June, 2009. Real GDP has grown for six consecutive quarters, for a total of a little more than 4 percent (from 2009 Q2 to 2010 Q4). The graph below illustrates the Real GDP growth in the first 6 and the first 10 quarters following the economic trough, as defined by the National Bureau of Economic Research. The current expansion’s growth in the first six quarters is moderately stronger than that which followed the previous recession and about the same as the initial expansion following the 1990 recession. Once you include the forecasted growth in the coming four quarters, the 8 percent Real GDP expansion for this recovery is again, slightly stronger than the prior recession; however when compared to previous business cycles, each of the past three recession have been characterized by underwhelming Real GDP growth. The takeaway being that the economy is recovering and in its second year of growth, however, the growth we are experiencing is not that of a v-shaped recovery and it is not expected to be moving forward.

Turning now to Total Nonfarm employment in Oregon and trying to determine the strength of the expansion in the state. While the expansion period is typically thought of as beginning at the economic trough and continuing through the economic peak (the recession is the peak to the trough), it is also useful to take a look at what you could call the net expansion. That is, how much employment or how many additional jobs are being added during the expansion, after you make up all the ground you lost during the recession. The graph below highlights this and the term expansion in the graph really refers to this concept of net expansion. The point being is that it takes time to regain the lost ground due to the recession and once you have done that, what additional growth have you experienced?

Now, taking the above terminology and concept, how do Oregon’s employment expansions compare over time and to the U.S.? (To paraphrase the conversation at the forecast release committee meeting, the following graph is one that nobody understands and that makes us good economists.) What the graph shows is the net employment expansion for both Oregon and the U.S. over time.

Note that as you move along the graph from left to right, you will notice that the lines increase above 100 and then revert back to 100, before growing again. As the lines grow above 100, this indicates net employment growth. For example, the red line (Oregon) increases to a value of 139 by 1970 and then reverts back to 100 during the recession. What this means is Oregon’s net employment expansion following the 1960 recession was 39 percent (an Index value of 139 equals a 39 percent increase). The Index then drops to 100 as the state lost jobs and remains at the 100 level until all the jobs lost during the recession were regained. As the Index moves above 100, beginning in late 1971, the next net expansion had begun and eventually culminated with a 17 percent increase in employment by late 1974.

It is interesting to see how much stronger the net expansions in Oregon have typically been since 1959 compared to the nation. In every single business cycle, Oregon’s total nonfarm employment increased by a larger percentage than the nation overall except following the early 1980s recession. As has been discussed on this blog numerous times, the early 1980s recession in Oregon was really one giant recession (our state’s Great Recession) even though the U.S. technically had two separate recessions in 1980 and 1981. Oregon essentially lost jobs for three full years from late 1979 through late 1982, totaling nearly 12 percent job loss during this time period. After such a steep decline, it took another 4 years before Oregon’s employment returned to its 1979 peak level. The blue U.S. line began increasing above 100 in 1984 as the nation had regained all the jobs it lost during the recession, however Oregon’s line does not begin increasing above 100 until 1987. Even though Oregon’s net expansion in the 1980s was three years shorter than the nation, our employment growth during that time period was nearly as strong overall  (16.9 percent for Oregon, 19.5 percent for the U.S.).

While the net expansions for both the U.S. and Oregon had been relatively robust during the 1959 – 2000 time period, the past two business cycles – especially for employment – are different. The jobless recovery following the dot-com bubble was truly jobless given that national employment did not really turn positive until a year and a half following the economic trough of 2001 Q4. It was not until 2005 Q1 that both the U.S. and Oregon had regained all the jobs lost from the 2001 recession and given the fact that the latest recession began in December, 2007, the time period in which the net expansion could take place was relatively short. In fact, U.S. employment only increased 3.9 percent and Oregon employment only increased 6.2 percent during this period.

The outlook for the current expansion is of a similar nature to the previous one. U.S. employment is currently 5.6 percent below peak levels, while Oregon is currently 7.9 percent below peak levels. The employment forecasts for both the U.S. and Oregon are relatively moderate – that is no strong growth to pull us out of the hole quickly. The U.S. is expected to return to peak employment levels around early 2014 while our office’s current forecast calls for Oregon employment to return to peak in late 2014. By 2017 Q4 (the last date in our forecast), the U.S. net employment expansion is 5.4 percent, while Oregon’s is 5.1 percent. If our forecast proves accurate, this net expansion will be on par with the prior one but a far cry from the strong growth of prior decades.


Responses

  1. […] are we adding above and beyond pre-recession peak levels. It’s been 3 years since we have showed this graph, but it’s dusted off now, upgraded to the latest version of Office and ready to go. In 5 of […]


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