The EDA Center | at the University of Minnesota  
Commentaries on Greater Minnesota

Periodically we will present commentaries on topics of interest to community and economic developers across rural Minnesota. Below is a list of all commentaries with the most recent listed first.

 

Commentaries
The Bathtub Recovery
June 2009
Jack M. Geller, Ph.D.
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In May of this year RealtyTrac™ reported that the foreclosure rate in April was more than 32 percent higher than it was one year ago and 1 percent higher than it was in the previous month of March. The U.S. Department of Housing and Urban Development also reported that in April privately owned housing starts were 12% below the rate of housing starts in March and a whopping 54% below the rate of housing starts in April 2008. This was followed by the Bureau of Labor Statistics that reported in April 2009 the U.S. lost an additional 500,000 jobs. Clearly, by anyone's count, April was not a good month for the U.S. economy. So how did the stock markets react to such bad news? Well ... it rallied!

The reason why all of these economic pundits talk so positively about the economy while all of the news around them is obviously bad is not really that hard to understand. Simply put, while the economic news is uniformly bad, it simply isn't as bad as many of them predicted. Therefore, as everyone searches for the bottom of this recession, news that is bad ... but not catastrophic suggests that we may be getting close.

Recently a variety of voices, both public and private seem to be suggesting just that; that our economy has now hit bottom or that the bottom is near. For example, Rich Karlgaard, the publisher of Forbes magazine was in Minnesota in early May and suggested that the economy might surprise us and actually turn around in the second half of this year. A few days later Peter Orszag, President Obama's new budget chief said on CNN that he believed the worst was behind us, and he is seeing signs that the bottom is near. And since that time there have been a steady stream of others who optimistically suggest that the recovery is surprisingly near at hand. Unfortunately, I am not one of them.

While I readily admit that it appears that our economy is nearing the bottom, it's important to realize that reaching the bottom doesn't mean that the recovery is at hand; and that is especially true in rural America. According to the Rural Policy Research Institute, while much of rural America seemed more resistant to the impact of the recession during its early stages, since November 2008 the job losses in many rural communities have been staggering. This has been especially true in rural areas that are disproportionately dependent upon manufacturing. While other rural areas appeared to be somewhat insulated early on with significant economic gains in agriculture and energy, even those areas are now succumbing somewhat to the impact of the recession. The truth is for many of those rural manufacturing jobs it's just too difficult to predict when or if all those jobs will return.

I suppose the best analogy to describe my views would be that the economy experienced a gaping wound and all of our efforts to date have simply been to try to stop the bleeding. Well the bleeding has certainly slowed and we may have the bleeding stopped quite soon. But once the bleeding has stopped isn't the real question, when will the healing begin?

Understanding the dynamics of a recession is one thing, but understanding the dynamics of an economic recovery is something else. Those who are hoping that the economic recovery's ascent will be as fast-paced as the recession's descent are kidding themselves. Federal Reserve Chairman Ben Bernanke's comments to Congress in May reference this reality when he noted that it is feasible that the U.S. economy may turn up later this year, however "even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while ..., In particular, businesses are likely to be cautious about hiring, implying that the unemployment rate could remain high for a time, even after economic growth resumes."

Translation: Economic output and growth will occur slowly in this recovery; first through gains in productivity and only much later will we see employment gains. I was recently told by a colleague that Art Rolnick, vice president at the Federal Reserve Bank of Minneapolis labeled such a phenomena a "Bathtub Recovery;" describing a rapid economic descent, followed by a prolonged plateau, followed by an eventual recovery. Sounds "spot on" to me.

Geller is professor & head of the Arts, Humanities & Social Sciences at the University of Minnesota, Crookston. He also serves as the director of the federally-funded EDA Center at UMC. He can be reached at gelle045@umn.edu

This document was prepared by the University of Minnesota, Crookston under award number 06-66-05709 from the Economic Development Administration, U.S. Department of Commerce. The statements, findings, conclusions, and recommendations are those of the author(s) and do not necessarily reflect the views of the Economic Development Administration or the U.S. Department of Commerce.

The University of Minnesota is an equal opportunity educator and employer.

 
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