How the Recovery Went Wrong

Posted by on May 23, 2012 at 10:12 am

First, exactly how weak has this recovery been? The Federal Reserve Bank of Minneapolis tracks economic performance for each recovery and compares gross-domestic-product growth and job growth, the two most important indicators of economic performance. Over the past 60 years, there have been 11 recessions and 11 recoveries.

Sadly, this recovery is near the bottom of all 11. Cumulative nonfarm job growth is just 1.9% 34 months into recovery, the ninth-worst performance and well below the average job growth of 6.5%. Cumulative GDP growth is just 6.8% 11 quarters into this recovery, less than half the average (15.2%) and the worst of all 11.

But wouldn’t things be even worse without massive fiscal and monetary stimulus? It’s true that monetary policy by the Federal Reserve has resulted in extraordinarily low interest rates, almost zero for the past three years. Normally, low interest rates would result in increased borrowing by individuals and businesses, generating increased economic activity. Its positive effects in this recovery, however, have mainly been to help the government borrow more cheaply, large banks recapitalize quickly, and homeowners refinance at low rates.

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