Step aside, RBC, it's time for NBC (New Business Cycle) theory, in a nice article in the WSJ today ...
In theory, output and income should go up and down together. If the economy is still expanding, why are so many households being squeezed?
One answer is that the business cycle itself is changing. Recessions in the past used to follow a predictable script. Business would slow or inventories would go up too much and catch companies flat-footed. As their own productivity dropped, they would belatedly respond by cutting back on workers. Then, as the process fed on itself, everything would go down together -- output, employment, income and productivity.
The 2001 recession changed the script -- productivity held up surprisingly well throughout. Companies cut back ahead of the business slowdown and kept doing it even after demand started rising again. The productivity they managed to squeeze out of existing workers bolstered output, even as it strained households.
The same thing seems to be happening again: To the surprise of many economists, worker productivity is rising, not falling.
Mathematically, a workforce contraction with relatively less GDP contraction gives off a signal of higher productivity. This is different: GDP is expanding while employment is contracting. I understand that the notion of GDP as a lagging indicator seems like the ultimate oxymoron ... because in fact it is. I refuse to believe the U.S. is in recession (and so should you) until it recesses. And yet, I can't get my head around an exploding unemployment rate (+0.4 percent in one month) in the context of a mere slowdown.
Recession or not? Yawn. Much more exciting question: How is the economy evolving?
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