The term "economic recovery" has no official definition. Depending on the benchmark one uses, the US economy may already have recovered from the Great Recession, may recover soon, or may never recover

1. Economics for your Classroom
Ed Dolan’s Econ Blog
When Will the Economy Recover?
What is “Recovery,” Anyway?
July 2, 2014
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2. When Will the Economy Recover? Public Opinion
 In June, 2014, a CNNMoney poll
asked Americans when they
thought the economy would
recover
 Only 3% thought it had already
recovered
 61% thought recovery would take
3 more years or longer
 3% thought it would never recover
 Are these views reasonable? How
do they compare with those of
professional economists?
July 2, 2014 Ed Dolan’s Econ Blog

3. What is the Definition of Recovery?
 There is no universally accepted
definition of “recovery” in business
cycle terminology
 Official sources use the term recession
for any period when the economy is
contracting and expansion for any
period when it is growing
 Economists and popular writers often
use recovery to mean the early part of
an expansion, when the economy is
getting back to normal after a recession
July 2, 2014 Ed Dolan’s Econ Blog
The Business Cycle Dating
Committee of the National Bureau
of Economic Research officially
defines the phases of the business
cycle as follows:
“A recession is a period between a
peak and a trough, and an
expansion is a period between a
trough and a peak.”
(Link to Committee website)

4. Previous Peak GDP as a Benchmark for Recovery
 One possible benchmark for “getting
back to normal” is the previous peak of
real GDP
 If we use that benchmark, the recovery
was completed in the second quarter
of 2011
 By the end of 2013, the economy had
reached a level of real GDP 6 percent
above the previous peak
July 2, 2014 Ed Dolan’s Econ Blog

5. Potential Real GDP as a Benchmark for Recovery
 Instead, we could use potential real
GDP as our benchmark for “back to
normal”
 The Congressional Budget Office
defines potential real GDP as the
level of output that is sustainable in
the long run without causing
excessive inflation
 As this figure shows, at the rate the
US economy has grown since the
start of the recovery, it would never
reach the CBO estimate of potential
GDP
July 2, 2014 Ed Dolan’s Econ Blog

6. Payroll Employment as a Benchmark for Recovery
 When many people speak of
“recovery,” they think of the job
market rather than GDP
 If we use the previous peak of
nonfarm payroll employment as a
benchmark, the economy completed
the recovery in May 2014
 However, if we use the prerecession
trend as a benchmark, the economy
may never get back to “normal”
July 2, 2014 Ed Dolan’s Econ Blog

7. Employment Ratio Benchmarks
 Instead, we could use employment
ratios as our benchmarks
 The unemployment rate is the ratio
of unemployed workers to the labor
force. As of mid-2014, it is well on its
way to the pre-recession norm of
about 5.5 percent
 The employment population ratio
is the ratio of employed workers to
the adult population. It decreased
sharply during the Great Recession
and is unlikely ever to return to its
prerecession norm, in part because
of an aging population
July 2, 2014 Ed Dolan’s Econ Blog

8. The Fed’s Dual Mandate as a Benchmark for Recovery
 The Fed has its own benchmark
for recovery, based on its dual
mandate to maintain full
employment and stable prices
 Its target for inflation is 2 percent
per year as measured by the
deflator for personal consumption
expenditures
 Its target for unemployment is
5.25 to 5.75 percent
 The Fed expects to reach both of
its targets by 2016
July 2, 2014 Ed Dolan’s Econ Blog
The red crosshairs and circles show the
Fed’s target of 5.5% unemployment and 2%
inflation. The blue line shows actual
performance since 2010. The green circles
show forecasts for 2015 and 2016

9. The Bottom Line
The answer to the question of when the
economy will recover depends on the
benchmark we use
 If we use the previous peak of GDP or
payroll jobs, the economy has already
recovered
 If we use the unemployment rate or the
Fed’s dual mandate, it will probably
recover by 2015 or 2016
 If we use potential real GDP or the
employment population ratio, the
economy may never recover
July 2, 2014 Ed Dolan’s Econ Blog

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