Two recoveries

My hypothesis is that we are poised for a recovery that is qualitatively similar, though somewhat slower, than the recovery of 1983-84. The economy has probably been growing since about July 2009. The 1981-82 recession hit its trough in the third quarter of 1982; GDP started to increase around October 1982. So May 2010 is analogous to August 1983. What did the economy look like in August 1983? This graph compares payroll employment growth for the first 10 months of each of the two recoveries.

The beginning of the increase in GDP at the end of 1982 was followed by three months of declining employment, a "false alarm" increase in January 1983, two months of flat employment, and then a strong rebound. Beginning in July 2010 we had four months of declining employment, a "false alarm" increase in November 2009, three more months of flat employment, and then what looks like the beginning of a strong recovery. So we seem to be about two months behind where we were in 1983.

In May 1983, two months into the employment rebound, the consensus forecast for GDP growth over the next year was in the neighborhood of 4.5%, which news reports acknowledged was somewhat slower growth than was typical of post-war recoveries. Over the next four quarters GDP grew at an annual rate of around 8 percent. Today the consensus forecast is for growth for the next year in the neighborhood of 3.5 percent...

I'm certainly not saying we're going to have growth of 8 percent over the next year. And this is not evidence that we're going to have a strong recovery. But let's put it this way: the data we have as of today does not contradict the hypothesis that we will have a strong 1983-style recovery.

Financial headwinds you say? In spring 1983 the Baa-Aaa interest rate spread was in the neighborhood of 170 basis points; today it's around 100. So to make the case for a slower recovery you need to appeal to special threats facing the US economy today that weren't around in 1983; certainly the situation in Europe qualifies, but it's too early to say that that will sink the recovery.