Small Matters: Economic recovery being fueled by fewer workers

Drew Arata, owner, along with his wife, Heather, of the Earth & State pottery store, helps a customer in his Media shop.
Drew Arata, owner, along with his wife, Heather, of the Earth & State pottery store, helps a customer in his Media shop. (RON TARVER / Staff Photographer)
Posted: June 06, 2011

  According to the National Bureau of Economic Research, the U.S. economy peaked in the fourth quarter of 2007 and the recession hit bottom in the second quarter of 2009. At the peak, our economy produced $13.4 trillion of goods and services - gross domestic product in 2005 constant dollars - and employed 146.3 million individuals, or 63 percent of all adults.

The percent of adults employed fell to 58 percent and the unemployment rate reached 10 percent during the recession. Growth resumed in the second half of 2009, but it was very weak compared with the bounce the economy experienced after other recessions ended.

GDP grew at an 8 percent annual rate in the 12 months after the 1982 recession ended, compared with 3 percent in the 12 months after June 2009. In the fourth quarter of 2010, our production finally exceeded the previous peak reached in 2007, by about $20 billion.

That's the good news. The bad news is that we produced that level of GDP using only 139.1 million employees, seven million fewer workers than in 2007.

Many observers call this recovery a "jobless expansion," and nearly two years after the recession bottomed, the employment picture is still weak, with 9.1 percent unemployment.

A number of factors explain this. First, the economic recovery has been led by a resurgence in manufacturing and exporting, a capital-intensive activity. Output increases in manufacturing require relatively less additional labor than in the services sector.

Another problem is the housing sector, a labor-intensive activity. Housing starts are a million short of the level that we would likely see in "normal" times, due to the overhang of dwellings built in the expansion and the millions of foreclosures that keep a steady supply of homes available for sale. This discourages building new ones.

Finally, consumer spending, which is 70 percent "services" - and dominated by small businesses - has been lagging as debt is repaid and consumers save more. Consumption spending was up only 1.7 percent in the first 12 months of the recovery, and by the end of 2010 was only 1 percent above the peak level reached in 2007.

This is very anemic spending, and Main Street feels it. One in four business owners report "weak sales" as the top problem; taxes and regulations took the next two spots in the voting.

The job loss in the recession was a "survival reflex" on Main Street, where too many firms with too much inventory and too many employees - created to satisfy a consumer that was spending every after-tax dollar he received - were suddenly confronted with a $400 billion decline in spending at the end of 2008.

Consumers decided to save a little. The percent of our after-tax income saved rose from 1 percent to around 6 percent. Not much to brag about (it was more than 10 percent a decade ago), but significant for the economy. Each percentage-point increase in the savings rate meant that consumers were spending $100 billion less in our stores.

Do the math: An increase of 5 percentage points in the savings rate reduced spending by about a half-trillion dollars - a huge reduction in spending.

To survive, small-business owners slashed prices to get rid of excess inventory (an inventory cycle adjustment that is about over) and employees were let go at the fastest pace recorded in National Federation of Independent Business' 37 years of surveying its 350,000 member firms.

It will take a major recovery on Main Street to reemploy the bulk of the seven million workers left unemployed from the bubble days. For perspective, in recent weeks initial claims for unemployment benefits have been well over 400,000 each week, so the United States is "firing" more than 1.6 million people per month.

There are six million employer firms in the United States, 90 percent of them employing fewer than 20 workers (e.g. small businesses). That is where the jobs needed to restore employment will be created, but with such a weak recovery and economic policy in disarray, that probably will not happen quickly.


Small Matters:

Editor's note

Bill Dunkelberg is an economics professor at Temple University, former dean of the school of business and management there, and chief economist for the National Federation of Independent Business, among other things. He is also a nationally recognized expert on small business and the small-business economy. His column will appear frequently in the Monday Small Business section.

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