17-Aug-2011 | Contributors: Abhishek Sikdar, Suman Chatterjee

Before Great Recession (2007)

Before the tumultuous subprime crisis and US recession of 2007, unemployment in US was riding at decadal low rates.

Following the dotcom bubble bust and consequent recession in 2001, the US economy staged a phenomenal comeback clocking 4.2% growth in 2004 led by robust manufacturing. During the period 2001-2007, the world's largest economy clocked a Compound Annual Growth Rate (CAGR) of 2.6%, a steady figure considered for a developed economy.

In 2002-2003, monetary accommodation and robust productivity growth led to the boom of economic activity. Real GDP grew steadily above the potential and long-term sustainable rate, which is estimated at 3% to 3.25%.

This type of trend continued even during the third quarter of 2004, when real GDP had grown by 4.25%. With this range of near or above-trend growth in economic activity, the pressure on resource use has slowly and gradually, but stably diminished - that is, jobs have grown by more than enough to recruit an expanding workforce, pushing down the unemployment rate.

In fact, by November 2004, unemployment stood at 5%, a figure that's close to conventional estimates, consistent with oft used term "full employment."  Simultaneously, capacity utilization in the dynamic American industry has catapulted - though at 79%, it is still typically lower than its long-run average.

Historically, the US economy has generated a stable overall GDP growth rate, a low unemployment rate, and terrific levels of research and development, and capital investment accrued by both national and growingly by foreign investors, due to decreasing saving rates.

Fig. 1: Correlation between US GDP Growth rate and Unemployment rate (%) after 2001

Source: BEA, BLS

Unemployment rate at 5.7% continued to trend below even after December 2003.  Following employment gains that totaled 277,000 in the prior 4 months, nonfarm payroll (about 90% of US workforce) was unchanged by the end of 2003. The number of unemployed persons was 8.4 million in December 2003.  Both the units of measures continued to shave off from their recent highs in June 2003.

There were job gains in temporary help services and construction, while losses were prevailing in manufacturing sector. The jobless rate was down from its most recent high of 6.3% in June 2003; most of the decline having occurred in the second half of 2003. Nonfarm payroll employment increased by 157,000 in December 2004, and the unemployment rate was unchanged at 5.4%. Job growth was generated in several service sector industries. Non-farm employment increased by 146,000 in June 2005, and the unemployment rate carried on to trend down, reaching 5%, then 1.3% points below the most recent high in June 2003.  This means that the economy was gaining traction in the post dot com bubble era.

The year before recession

Only one word - slowdown - can define the US economy in 2006. Economic growth and job growth both nosedived in 2006 from previous years as the residential housing boom came to an inflexion point.

• The slowdown in employment growth and economic opportunity was locally grown as consumers faced debt payments on the tremendous quantum of debt stacked up in past years. This debt squeeze left lower amount of money available for household expenditures and had been already pushing many diligent families over the cliff amidst increasing loan defaults and bankruptcies.
• Although at the same time, the Bush government in 2006 maintained to run large deficits which were given aegis largely by overseas investors - leading to greater interest payments out of the US Treasury. This outflow in turn aggravated an existent record high trade deficit fuelled by America's large dependence on foreign oil and rising oil prices over the last year. Job growth continued to ratchet down during this period.

In 2006, the economy continued to add on an average 149,000 new jobs a month, down from 165,000 new jobs in 2005 and 175,000 in 2004. Job growth was 14.5 % lower in 2006 than in 2004, the year with the greatest job growth in the business cycle that started in March 2001. Wages constituted a record breaking miniscule share of national income.

Condition during the Great Recession (2007)

The economy grew by only 1.2% in the first quarter of 2007 as the US housing bubble busted. A depreciating dollar boosted exports, triggering growth to 3.2% in the second and 3.6% in the third quarters.  Overall, the economy expanded 2.1% in 2007, though the unemployment rate was on an upward momentum.

In 2008 and 2009, the economy was down for four consecutive quarters. Last time, this sort of slowdown happened was during The Great Depression of 1930s.

In December 2008, amidst subprime crisis, employment continued to go down in construction, manufacturing and employment services, while health care and mining still added jobs.  Nonfarm payroll employment (refer Fig. 2) fell sharply by December 2008, and the unemployment rate grew from 6.8% to 7.2%. 

Nonfarm payroll employment edged down (-85,000) in December 2009, and the unemployment rate skyrocketed to 10%.  Employment fell in construction, manufacturing and wholesale trade, while temporary help services and health care boosted jobs.

Compare this to the start of the recession in December 2007, when the number of unemployed persons was 7.7 million and the unemployment rate was 5%.

Fig. 2: Nonfarm Payroll Employment for the period July 2007 - July 2009, seasonally adjusted

2010 - Condition after Great Recession

Even after the official end of the Great Recession in 2009, the US unemployment rate continued to rise further. (refer Fig. 3)

In June 2010, after the newly elected President Barack Obama undertook $787 billion stimulus package total nonfarm payroll employme