Remind Me, Again: What Is Supposed to Drive Full Recovery?

Take “full recovery” to be a recovery to 87% (not 89%) in the share of 25 to 54-year-old males at work:

Graph Employment Rate Aged 25 54 Males for the United States© FRED St Louis Fed

Or a recovery to 72% (not 74%) in the share of 25 to 54-year-old females at work:

Graph Employment Rate Aged 25 54 Females for the United States© FRED St Louis Fed

What could produce such a thing? Exports are already very strong, and with both Europe and Japan seeking additional monetary expansion relative to the U.S. the large decline in the dollar needed to further boost exports does not seem to be in the cards. Equipment investment is strong, especially since we would expect it to be 1%-point or so below normal given the slackness in the economy: low employment and low growth should mean low equipment investment as well. And the kind of inflationary expectations that would lead businesses to think they should build capacity ahead of demand seems unlikely to proceed–although it might follow–full recovery. And we do not see consumption spending filling the remaining output gap either, for consumer optimism seems unlikely the absence of the kind of job security that is found only in the tight labor market that would follow full recovery.

FRED Graph FRED St Louis Fed

That leaves us with only two possibilities: The first is a housing boom–or, rather, a restoration of investment in single-family housing to its normal share, or an unprecedented multifamily unit housing construction boom. The second is a restoration of government purchases to their normal share of GDP.

Anyone want to give odds on those two?

May 26, 2015

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