Slow going

IN FEBRUARY, for the twenty-fifth time in 26 months, the American economy shed jobs. The toll—a decline of 36,000—was smaller than feared for a month of severe winter weather. But it was distressing nonetheless; another bit of evidence pointing towards a jobless recovery. Most economists estimate that the recession in America ended around the close of the second quarter of 2009, the last quarter in which GDP shrank. But during the second half of last year the economy still managed to lose more than a million jobs.

One explanation for the divergence of output and employment, which started to emerge while the economy was still shrinking, is that firms are now able to wring more productivity out of their workers. Rising labour productivity is a common feature of the early stages of recovery, as employers respond to increases in demand by working staff harder and delaying new hiring. But this time round productivity figures have been well above normal. Last week the Bureau of Labour Statistics reported fourth-quarter labour-productivity growth of 6.9%, after increases of 7.6% and 7.8% in the previous two quarters. That amounts to one of the strongest nine-month productivity performances America has notched up in the post-war period.

An alternative explanation for the divergence is that the American economy simply hasn't been doing as well as the output figures have suggested. GDP—the total market value of output produced each year—is the most commonly used indicator of the “true” state of an economy. A theoretically equivalent but less commonly-cited indicator is Gross Domestic Income, which adds up wages, profits and taxes. In practice, the two numbers often move slightly out of step with each other, and a growing body of research hints that GDI, rather than GDP, should be given more weight in computing an estimate of the economy's true direction.

By the light of GDI, the American economy looks a bit more pallid. According to the income measure, activity slowed at a 7.3% annual rate in the fourth quarter of 2008. GDP, meanwhile, recorded a 5.4% drop. And in the third quarter of 2009 (the most recent for which income data are available), GDI continued to contract while GDP notched up the increase that led many economists to announce the end of the recession.

The picture painted by GDI throughout the downturn is one of an economy substantially weaker than indicated by GDP: one more in line with the employment data and with the experience of most Americans. But whether productivity or unexpectedly weak growth is to blame for high unemployment, there is a danger that policymakers have failed to recognise the full extent of the slack in the economy. The result may be a disappointingly slow, fragile and jobless exit from recession.