GDP and Unemployment in the U.S., Euro Area, Japan, and Britain

November 16, 2009

The recession bottomed in the second quarter in the United States and Euroland, the first quarter in Japan, and was still going last quarter in the United Kingdom.  At those respective lows, real GDP had declined from peak by 8.4% in Japan, 6.0% in Britain, 5.1% in the euro area, and 3.8% in the United States.  Economic activity expanded last quarter at annualized rates of 4.8% in the Japan, 3.5% in the United States and 1.5% in Euroland but contracted 1.6% annualized in Britain.  In 3Q09, real GDP remained 6.7% below the prior cyclical peak in Japan, 6.0% below peak in Britain, 4.8% below peak in Euroland, and 3.0% under peak in the United States.  Examined through a GDP lens, the United States experienced a milder contraction than the three other economies here compared, but it was still the deepest recession since World War 2.

U.S. unemployment bottomed at 4.4% in March 2007 and was still cresting in October at 10.2%, 5.8 percentage points (ppts) above the trough.  Euroland joblessness bottomed in March 2008 at 7.2% and has risen just 2.5 ppts to 9.7%.  British unemployment bottomed in 2Q08 at 5.2%, peaked 2.7 ppts higher at 7.9% in June-August and then posted its first downtick since the recession began, albeit to just 7.8% in July-September.  In Japan, where a tradition of lifetime employment used to be part of the implicit social contract, the jobless rate began climbing from a base of 3.6% in July 2007, reached 5.7% in July and has already settled back to 5.3% for a net increase of 1.7 ppts.  The United States may have had the mildest downturn from the standpoint of the contraction in GDP, but its labor market was slammed the hardest.

How then should one reconcile these disparate rankings?  Economists will not know for sure when the subsequent business cycle starts to take shape.  From the standpoint of how people perceived the recession, labor market trends are more influential than trends in GDP.  In a long recession, the pain of recession and  long-term impact on national confidence are apt to be greater than in the case of mild recessions like those at the start of this decade and early in the 1990s.  Voting patterns will be influenced more keenly, too.  Both of these tendencies will be reinforced if the ensuing economic upswing is atypically slow, as most analysts expect from the present business cycle.  One is left to conclude that even though the United States faired comparatively well in this recession according to the popular GDP yardstick, that would not be the correct inference to draw looking at a broader range of parameters.  Instead, America is likely to be left as if not more badly scarred than Japan or Europe.


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