At some point over the last seven years, you have probably heard someone—a friend, a business executive, the president of the US—say that the 11 September attacks sent the American economy into a slump.
It’s an understandable enough notion, given that the attacks occurred in 2001 and a recession began that same year.
But it’s simply incorrect. The economy started shrinking in March 2001, largely because of the hangover from the technology bust.
The attacks did cause a sharp drop in the stock market, but if you were to go back and look at, say, the quarterly numbers on consumer spending, you wouldn’t even know a major event had happened in September. By November, the economy was growing again.
The current downturn—and I’d say the odds that it’s a true recession are about 75%—has not one dominant mythology. Instead, there are several different myths starting to make the rounds. Just like the one about 11 September, they tend to make the economy’s problems sound simpler than they really are.
Today’s column will be my last until early September. I’m going to finish working on a couple of projects and then take paternity leave. Before heading off, I wanted to take a stab at predicting which economic fictions are likely to get the most air time over the rest of the summer.
Eyes glued: Traders work on the floor of the New York Stock Exchange on Tuesday. (AP)
Forecasting may be a fool’s game, but, to steal a line from William Safire, “If you don’t play, you can’t win.” So, here goes.
On Thursday morning, the labour department will release the latest jobs report, which is typically the most telling economic indicator. It covers the entire economy and gives a sense of how families are being affected by it. This week, economists are expecting yet another bad report, with a sixth straight month of job losses.
But whatever the report shows, the job market is likely to remain weak through the end of the year, because employment generally continues to fall for months after a downturn has ended. That means we are soon going to start hearing a lot about layoffs. Big layoff announcements will be treated as a symbol of all that’s supposedly wrong with the economy.
Strangely enough, though, layoffs have very little to do with the economy’s problems. Since 1992, the labour department has been tracking something called “gross job losses”, which is the number of positions eliminated at a given office or job site. In 2007, these losses were at nearly their lowest point on record, just above the 2006 level. That’s right. Last year, companies eliminated significantly fewer jobs than they did in any year of the fabulous late 1990s boom.
Unfortunately, gross job gains—the new jobs created— have fallen more sharply than job losses. Companies have gone on a hiring strike, says Ed McKelvey, a Goldman Sachs economist.
Existing firms aren’t expanding much, and not enough new firms are starting. The country is suffering from an innovation deficit.