THE economic recovery that has followed the end of the 2007-9 recession may be properly named the private enterprise bounce. While the overall recovery is comparable to recoveries after the two previous recessions, this one has been pushed higher by rising private investment and hiring, and held back by cuts in government spending and hiring.
Over all, the economy has grown a little more slowly, as measured by gross domestic product, than it did during comparable periods of the two previous recoveries. Preliminary figures for the fourth quarter of 2011 show the economy 6.2 percent larger than it was when the downturn ended, against 7.3 percent gains after the two previous downturns.
As reflected in the accompanying charts, the most impressive increase has come in the area of private investment, not including housing. It took a few quarters for businesses to begin to invest, as usual, but then the money poured in. That last report shows the level of investment is now 17 percent higher than it was at the end of the downturn. Neither of the previous recoveries did as well during the first 10 quarters of recovery.
But the government sector of the economy, adjusted for inflation, is nearly 3 percent smaller than it was when the economy hit bottom. By contrast, government spending had little impact on the recovery that began in 1991 but was a major part of the recovery that began in 2001.
Similar patterns can be seen in total employment in the United States. In each recovery, hiring was slow to start. This recovery so far has outpaced the 2001 recovery, but not the earlier one. That is largely because state and local governments have been reducing their work forces.
The current recovery followed a much more severe downturn than the earlier ones, and the nature of the latest recession continues to impede the recovery in several ways. Spending on personal consumption — the largest part of the economy — is rising less rapidly than in previous downturns, no doubt related both to the high level of unemployment and to the decline in home prices, which has reduced the availability of credit for many.
In previous recoveries, spending on housing construction was an important contributor to growth. By this stage of the previous two downturns, spending on residential investment was up more than half from the level at the end of the recession. Now, it is substantially unchanged. The housing industry is no longer a drag on the economy, but neither is it contributing to the recovery.
A money manager, James W. Paulsen of Wells Capital Management, argues that the similarity of this recovery to the previous ones suggests that 2012, like 1994 and 2004, is what he calls a “gear year.” If so, he said, we can expect the unemployment rate to decline and “confidence throughout the economy will rise,” leading companies to step up both hiring and capital investment.
Floyd Norris blogs on finance and the economy at nytimes.com/economix.
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