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Thursday, February 25, 2010

Fed's Pianalto: "May take years to get back to 2007 level of output"

by Calculated Risk on 2/25/2010 09:15:00 AM

From Cleveland Fed President Sandra Pianalto: When the Small Stuff Is Anything But Small. A few excerpts:

You know we have been through one of the most severe and longest recessions in our nation’s history. The recovery from the recession may also end up being one of the longest in our history. In fact, it may take years just to get back to the level of output we enjoyed in 2007, just before the economic crisis began.

Some of you may think I am being too pessimistic. After all, we saw a strong GDP growth estimate for the fourth quarter of last year--nearly 6 percent at an annual rate. But I think that figure overstates the underlying strength of our economy right now.

This is a case where paying attention to the small stuff--the details beneath that impressive number--reveals a more complicated story of what is shaping up to be a gradual recovery. Most of the thrust behind that impressive fourth-quarter GDP growth figure owes to a rebuilding of inventory stocks, which had been cut to the bone and could no longer support even a mild economic recovery. Over the course of this year, I expect overall growth in employment and output to be on the weak side for the early stages of an economic recovery.

For many American households and businesses, this is a recovery that just does not feel much like a recovery. Let me point to two reasons why this is so. The first is due to the large amount of excess capacity that has accumulated. As spending declined in the recession, firms of all sizes cut back, drastically in many cases.
Excess capacity is a dilemma for businesses of all sizes. They can maintain capacity for only so long without an uptick in sales, and they’re confronting a market where demand is only gradually recovering after having fallen off a cliff. In fact, according to the most recent survey of the National Federation of Independent Business, or NFIB (January 2010), members cited poor sales as their single most important problem. The latest American Express Open Pulse Survey also expresses a similar perspective. A very slow recovery in demand, which translates into low sales for most firms, makes it far tougher to maintain idle capacity over time. ...

One of the forces holding back demand is the continuing high level of unemployment. Indeed, poor labor market conditions pose another large challenge to the recovery. ...

The duration of unemployment is also a big concern. According to the Bureau of Labor Statistics, the share of workers who have been without jobs for 27 weeks or longer now stands at 41 percent--the highest number since this series began in 1948.

Clearly, massive layoffs contributed to these large unemployment numbers, and fortunately, layoffs slowed months ago. Our current problem is a lack of job openings. In fact, the job-finding rate now stands at a historic low. Businesses are not creating new jobs very quickly, and where labor utilization is picking up, employers are simply restoring hours that had been previously cut.
So, to sum up, while we are likely now in a period of recovery, it doesn't really feel much like one. All types of businesses are continuing to see weak levels of demand – in other words, they don't expect to see a bounce-back in sales for quite a while yet. This in turn creates excess capacity, which leaves businesses having to decide whether to maintain or shut idle plants and offices. In such an environment, firms are being cautious about new hiring and so unemployment persists at a high level, which in turn restrains spending. From any perspective this is not a pretty picture, but it is especially challenging for small business ...
Some of these bloggers Fed Presidents are pretty pessimistic!