Originally published in The Boston Globe
Sunday, February 17, 2002

A Rebounding Economy Can Strand Worker
By Martin and Kathleen Feldstein

The American economy is showing its resiliency once again with a recent string of positive statistics. Economic forecasters are revising their outlook, with virtually all seeing strong growth in the second half of the year.

But even after the economy turns around, it may still feel like a recession to the average American- just as it did when the economy last went through a business upturn a decade ago. That's because unemployment takes longer to respond than other economic indicators.

Unless GDP growth is sustained above about 3.5 percent, the unemployment rate probably won't fall much below the January level of 5.6 percent.

Why be optimistic about this year's growth? Importantly, industrial production seems to be stabilizing after more than a year of steady decline. And while one month of improvement is certainly not definitive, three critical indicators are now suggesting that the recession of 2001 will soon be over: new nondefense factory orders have begun to increase; consumer spending is up; and inventories have been reduced dramatically.

Those figures tell us that overall demand is up. And since businesses have been working off excess inventories by cutting production in the last year, industrial production may soon pick up now that factory orders are increasing.

But it will be several months beyond the trough before the economy gets back to the levels of last spring. During this first recovery phase, output, production and employment will be rising, but people will still say-correctly-that the economy isn't as good as it used to be. And while there will be more people at work than today, there also may be more people looking for work unsuccessfully.

The outlook for unemployment depends primarily on how rapidly output grows and what happens to productivity. Productivity growth was the big story of the late 1990's, when output per worker rose at a much faster rate than it had for the previous 25 years. But even though productivity has held up well during the recession, it is likely to slow down. If we assume the consensus outlook of 2.5 percent GDP growth over the next year, employment in turn must increase by about one percentage point-exactly the labor force rate. If jobs and job-seekers increase at the same rate, the overall rate of unemployment won't fall.