4 Such a growth rate has some historical precedent, as shown on the right side of the chart, but it is much faster than the growth rate in the past two recoveries. And to reach 5 per cent unemployment by 2015 would still take growth averaging 4.2 per cent per year – considerably faster than the average rate of growth after the 1991 and 2001 recessions. Given the need for very rapid growth to get unemployment back to 5 per cent, let me pose an oversimplified question – why would policymakers not keep monetary policy very accommodative, and fiscal policy very stimulative, until we had a sustained growth rate that brought the economy much closer to full employment? At least on the monetary side, one reason might be concern among policymakers that rapid growth would be inflationary. To explore that, let’s turn to Figure 7, which shows the total and core inflation rates, measured by changes in the CPI, with recession shading. What the chart shows is that inflation has declined in each recession, including this so-called Great Recession. It also highlights that inflation tends to continue falling in the early stages of a recovery. Figure 8 shows the change in the inflation rate from the business cycle peak. From the peak (shown at zero on the horizontal axis) the inflation rate is very restrained, and generally negative, for many months.
The sharp reduction in the ratio of employment to population highlights our challenge – achieving a full recovery will require creating jobs for those currently unemployed and actively seeking work, those entering the labor force as the population grows, and those likely to return to the labor force once jobs become more available. Employing all these workers within a reasonable period of time will require very strong economic growth. The question is, how likely is that? Figure 4 shows the growth rate in each of the first three years of the last three recoveries, as well as the average rates for all three recoveries. The most recent two recoveries were quite slow to get started, but picked up steam over time. This is the pattern projected in most forecasts for this recovery. Over the past three quarters, GDP has increased 3.7 per cent. 3 However, some of the growth resulted from temporary rebalancing of inventories by businesses, as suggested by Figure 5, which shows that the per cent change in real final sales was quite a bit smaller than the per cent change in GDP. The gap between them would be inventory rebuilding. Most private forecasts expect growth in the next four quarters to be fast enough to begin to make more improvement in the labor market. My own expectation is consistent with this. As financial headwinds subside, and consumers and businesses gain more confidence in the recovery, expenditures that have been deferred will be made – and we should begin to see stronger economic growth.