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Will Unemployment Prevent Recovery From the Recession?

August 3, 2009

By Bill Conerly, Businomics, Conerly Consulting,

One question I get in my speeches goes like this: Won’t our high unemployment rate prevent an end to the recession?  After all, people out of work don’t spend much money. Think about this a moment.  How did we ever get out of the recession of the early 1980s, when unemployment rose well above 10 percent? Or how did we get out of the mid-1970s recession, when unemployment rose to nine percent?  In a few years it had fallen beneath six percent.  How did that happen?

It turns out that the economy has some self-correcting features in it.  Also, policy may help extract us from recession.  The self-correcting features include–believe it or not–consumer spending.  The drop in consumer spending has been disproportionate to the decline in incomes.  That is, most of the drop was due to employed people who were scared, rather than unemployed people.  When the employed people realize that they have dodged the bullet, they start spending.  So the key factor isn’t so much the behavior of people out of work, but the behavior of those who still have their jobs.

Inventories also help correct the economy.  Businesses have cut back on their inventories, forcing producers to cut back on their output.  When businesses simply level out their spending, the economy will be relieved of a major negative.

One other self-equilibrating factor will not be at work this recovery.  In recessions, interest rates typically fall, stimulating new housing construction.  However, our excess housing inventory will prevent that from working this time round.

One last comment on unemployment:  look carefully at the historic pattern and you’ll see that the unemployment rate is a lagging indicator, meaning that it starts to improve after the overall economy is already improving.  As such, it does not prevent the economy from improving.

If high unemployment prevented a recovery from recession, then we never would have recovered from our first recession.  But we’ve recovered from it, and from every other recession.

There are plenty of things to worry about.  The high unemployment rate preventing a recovery is not one of those things.

  
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Discuss this article

Sil August 3, 2009

So I guess the question is, How long before the “employed people” will re-commence spending? And I guess the answer is, Who knows?

Sybella August 3, 2009

Things won’t improve for employment this year though because of the government. Mandated increases in wages, which really only cause higher prices and don’t help the employees and taxes. For some reason, our liberal government believes that businesses have money to burn. Not so. Most of the gross incomes to pay costs of keeping the business running, such as the things you buy to sell, and payroll and insurance and taxes. We are wondering if we’ll be able to keep our doors open.

If they really want to see that people are employed, they should really give a break to those that employ them. Business does not operate on the same principle as government. Government needs more money, they just take it from us. If business needs more income, they can raise their prices, sure, but unlike government we have competition. If my prices are higher than my competitors, I lose.

The current situation is a virtual disaster in the making.

Aplha Dog August 3, 2009

And so what break do businesses exactly need? Are you talking reducing corporate taxes? Capital gains? Regulations? what?

hoodia August 28, 2009

Nice but i think something is missing.

Kaguetusgathy November 25, 2009

Thank you for details. It helped me in my task

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