Painting the slow US recovery with graphs

Repost from John Cochrane's blog:

1) Real GDP levels seem to have assumed a lower trajectory since 2007...

2) ...and, while it is necessary to be skeptical of trend lines in general, the above trend line is pretty solid throughout the years.

3) Here's what a recovery is supposed to look like (still, using trend lines); this shows recovery from the recession in the early 1980s...

According to John Cochrane:

You see that after the severe 1980 recession at the even more severe 1982 recession, the economy recovered to trend, by posting a few years of 6% growth. The tragedy is poorly expressed in growth rates. By 1987, the economy was back on the prior trend line. We are now 14.5% below the trendline, and each year that goes by like this we lose another half a percent. The average person in the economy is producing 14.5% less, and earning 14.5% less, than if we had followed the path following the 1982 recession.

 4) According to the Congressional Budget Office, what we're seeing now is the "new normal".

 

5) The employment picture is just as dismal:

Employment declined by about 7 million people, from 63% of the population to about 58%. And it has stayed there ever since. The "job gains" you hear about in the news are just barely keeping up with population. As we are about 14% below trend and slowly losing ground, we are 7 million jobs short and sitting there too.

 

6) Of course, linking output and employment is productivity. The graph below seems to show that output per worker has grown a lot since the 1960s and 1970s...

In the short run, capital doesn't change much, so as a rough guide you make more output when you hire more workers (or increase hours) and vice versa. So, GDP = Productivity x workers. To get more workers, we need to make a lot more GDP. The lackluster GDP growth is the other side of the terrible employment coin.

There's more in the graph. In the long run, rising productivity is behind everything good in the economy. It's what gives more income per capita. Rising productivity is the only hope for paying for entitlements and getting out of our deficit trap. It's the main hope for long-run GDP growth, after the empolyment-population ratio reverts to where it should be. Rising productivity comes from new ideas, new companies, new ways of doing business. It isn't all pleasant. Lots of incumbents lose out. Rising productivity is the core of a "growth" agenda as economists understand the word. 

 

7) Worst, zooming into the 2000s productivity data, the trajectory since 2003 is noticeably lower.

 

In sum, total real output and output per worker seem to be doomed to lower trajectories in the future, owing to the real impacts of the 2007-2008 financial crisis, and employment is hardly keeping up with the US population. The US is in for rough decades ahead (sadly, so does the rest of the world).