Yes, Virginia, It May Turn Out All Right After All

Yes, Virginia, It May Turn Out All Right After All


Just 10 days after the unemployment rate jumped to an ugly 9.8 percent, an unfamiliar presence has begun to creep into American economic headlines. It is optimism (remember that?), and it suddenly seems to be busting out all over. These three headlines appeared separately on Bloomberg yesterday morning:

All of this confidence and upside surprise would have been unimaginable just a few months ago, and indeed, it’s proving hard to accept them at face value even now. Economist Ed Yardeni captured the mood among money managers recently: “Everywhere I go, I am finding lots of fully-invested bears … They all share the same universal conviction, most commonly stated as, ‘It will all end badly.’”

But suppose for a giddy moment that they’re wrong? The future remains a complete mystery, even to those, like money managers, who are in the business of trying to figure it out. Like all the rest of us, money managers and economists are subject to what psychologists call “availability bias” — the tendency to project the most vivid event in our memory as the most likely to happen in the future. (It’s the reason that shark attacks off Long Beach, Calif. keep swimmers out of the water on Long Island, NY.) The financial crisis is still all too with us — we have “2008 on the brain,” in writer James Grant’s words — and that may be enough to keep us from taking yes for answer to the question of whether the Great Recession has truly ended.

Of course, we know from history that recessions caused by financial crises take a long time to work themselves out. And economists tended to react to the stubbornly high unemployment rate as proof that this is one of those tar-pit recessions. In this view, signs of recovery — like those Bloomberg headlines — aren’t to be trusted.

But again, what if that unemployment rate isn’t that abnormal for a recovery? Jim Paulsen, the inveterately upbeat chief investment strategist of Wells Capital thinks that those depressing unemployment numbers don’t deserve the weight that economists at the Fed, politicians and the press attribute to them. The job market recovery is slow compared to the long-term historical record, he admits, but it isn’t any more sluggish than similar rebounds in the past 25 years.

What’s so different about the past 25 years? Two things, says Paulsen: First, the labor force expansion that fueled economic growth since World War II ended quietly in the mid-1980s. The baby bust generation began to enter the workforce in the 1980s, slowing the growth in fresh blood, and women had largely been integrated into the workforce by then, so that women were no longer a source of workforce expansion. In addition, says Paulsen, employers before the mid-1980s were mostly concerned with not losing market share once sales rebounded, a luxury provided by the inflationary environments of the day.

More recently, employers began to focus on productivity and cost control as they rebuilt their workforce and tended to delay hiring as long as possible. As a result, the 1991 and 2001 rebounds did not create many new jobs until they were two years along. Viewed in that light, concludes Paulsen, “the current job market recovery is actually quite ‘normal.’”

To be sure, the inveterately sunny Paulsen is an outlier, as he has been throughout the past three years (when his outlook proved far rosier than events later proved). But his explanation does address the mystery of why the closely-watched unemployment number is so out of tune with the generally optimistic tenor of other economic indicators lately, from global trade (up 50 percent from the low in 2009), the stock market (up 90 percent) and CEOs’ opinion of their own business prospects.

And yes, there is still plenty of reason to be watchful. The days’ optimistic headlines haven’t come cheap — stimulated by a trillion dollar deficit, bolstered by a tax cut compromise that will add another $900 billion to the debt — so there’s a serious question about whether the rebound can be sustained once it comes time to pay the debt back. But for now, there’s no reason not to join cautiously in the outbreak of optimism. Once it gets going, it can be a self-fulfilling prophecy.