April 17, 2002

April Industrial Production Release

In March industrial production in the American economy grew by 0.7%. At the pace of growth of the first three months of 2002, industrial production next December would be fully 6% higher than industrial production last December. This industrial production rise is the latest in a series of pieces of news that the U.S. economic recovery is on track, and that when the National Bureau of Economic Research's Business Cycle Dating Committee makes its decision, it will call the end of the recession as coming last December, only a month after they met to decide that the recession had begun in March of 2001.

Of the four key indicators of the state of the business cycle--incomes, sales, production, and employment--only employment is still signalling a possible continuation of the recession. Incomes never went through a period of decline at all. Sales growth since 911 has been strong. And the past three months have seen industrial production reverse the slide it began in June of 2000. Only employment continues to be flat, refusing to grow.

Why is employment sending a different signal? Because just recently, after stalling throughout the entire year of 2001 as the unemployment rate rose, President George W. Bush agreed to extend the duration of unemployment benefits for 13 weeks to cushion the impact of the recession on those among the unemployed who are having difficulty finding jobs. But whenever you extend unemployment benefits, you virtually guarantee yourself a half-a-percentage-point rise in the unemployment rate relative to its underlying trend: with longer benefits, people will take more time to find their next job. This may be a good thing (producing better matches between firms and workers) and this may be a bad thing (reducing total social welfare). But it is definitely a thing. President George H. W. Bush, after stalling throughout the entire year of 1991 as the unemployment rate rose, finally agreed to extend unemployment benefits at the start of 1992. He thus guaranteed himself bad unemployment news throughout the presidential primary season in spite of what appeared then and appears now to be a healthy recovery otherwise.

So why did President George W. Bush stall on extending unemployment benefits throughout 2001? Why did he agree to extend them only after what looks like the trough of the recession has passed? I can't understand it.

Posted by DeLong at April 17, 2002 03:48 PM | TrackBack

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