The Great Recession started in December of 2007 and officially ended in June of 2009, for a total of 18 months. The recovery has been slow and painful, so it should be no surprise if people thought the recession actually lasted much longer. From an economic perspective, the recession set us back many years. Some people couldn’t find jobs then and may still be struggling now. The last few years have been among the worst for young people entering the labor force, because even when we are at full employment years later they’ll be competing with the newest grads for entry level jobs.

So that got me thinking about what the economy could look like if we’d never had the recession at all. Let’s look at a few indicators:

S&P500 actual vs potential

The stock market has had a few great years since 2009, but we’re still very far behind where we could be.  This assumes that from the point of the recession beginning, the stock market returned 7% annually.   That’s not an outrageous assumption.  And as you can see, the “all time highs” we’ve heard about wouldn’t compare to where we could have been.

employment actual vs potential

Jobs are probably the easiest things to understands.  And when the recession began there were 138 million people working.  That number fell off a cliff as millions of people lost their jobs.  The recovery has been slow, but obvious.  And it could be picking up steam.  The working age population grew about 3.2% between the recession and today.  So that’s the growth that was applied here to see the potential employees.  This assumes that the labor force participation rate and unemployment rate did not change.  That’s not likely, but you have to hold a couple of things flat to show the potential growth.  The gap is narrowing, but we’re still talking more than 5 million people missing out on jobs.

GDP Actual vs Potential

Finally, let’s take a look at the good ole GDP.  The assumption here is that the economy grew at 3% annually during this period.  Again, the gap is starting to narrow, but there’s quite a bit of economy left on the table here.  And that would make the difference for those 5 million people.

Showing the potential for the economy is always an exercise in caution.  Prior to the recession we experienced some fairly strong economic growth.  The events that grew the economy are the same as the events that created the recession.  So it’s hard to use the beginning of the recession as a starting point for what we’ve missed out on.  But it’s also helpful to understand how economic slowdowns can hold us back.  The stock market and GDP will recover in time.  But people only live for so long, and a decade of underemployment holds everything back.

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categories: economics, investing, jobs