What is a Growth Recession?
Growth recession is an expression coined by economist Solomon Fabricant, a professor at New York University, to describe an economy that is growing at such a slow pace that more jobs are being lost than are being added. A growth recession does not reach the severity of a true recession, but still involves a rise in unemployment and an economy that is performing below its potential.
Key Takeaways
- In a growth recession, the economy is growing, but at a very slow rate.
- The full technical definition of recession is not met, but some symptoms of a recession, such as rising unemployment, still occur.
- Growth recessions can occur as simply a milder form of recession, as part of an extended, sluggish recovery from a declared recession, or due to structural and technological change in the economy unrelated to normal business cycles.
Understanding Growth Recession
A recession is a significant decline in economic activity that goes on for more than a few months. It is visible in industrial production, employment, real income, and wholesale-retail trade. However, an economy that is growing but is also expanding more slowly than its long-term sustainable growth rate may still feel like a recession, or growth recession. It can seem this way even if economic growth is not actually dipping below zero. This is because growth is so weak that unemployment rises and incomes fall, thus creating conditions that feel similar to a recession.
A growth recession is often associated with minimal price inflation because many people are out of work and may have to curtail discretionary spending, and as a result, inflation will remain low. People fortunate enough to have jobs in a growth recession may find that their real incomes and spending power increase. For borrowers, there may be a benefit because the lack of inflationary pressure means central banks are likely to keep interest rates low.
Implications of a Growth Recession
Growth recessions may not garner the same media attention as a recession, but they have a wide range of implications nonetheless. Many economists believe that between 2002 and 2003, the U.S. economy experienced a growth recession. Economists also described the years of sluggish recovery following the Great Recession of 2008–2009 as a growth recession because the economy grew, but at tepid rates over several years and often did not create enough jobs to either absorb new people entering the job market, or to reemploy those still unemployed from the Great Recession. For example, in the second quarter of 2011, real gross domestic product (GDP) increased at a 1.3% annual rate, according to the Commerce Department, far below the robust 3% rate that economists say is necessary to create jobs. Consumer spending, which accounts for 70% of U.S. economic activity, rose just 0.1% in that quarter.
In fact, on several occasions over the past 25 years, the U.S. economy is said to have been in a growth recession. That is, despite GDP gains, job growth was either non-existent or was being destroyed at a faster rate than new jobs were being added.
Economic Change and Growth Recessions
Structural change in the economy can result in a temporary growth recession. The growth and development of new industries, and decline of others, as a result of new technologies or changing consumer preferences can produce simultaneous economic growth and rising unemployment. Any time the number of jobs destroyed in the old, declining industries exceed those created in the new or growing industries, a temporary growth recession can occur.
Technological progress by itself can sometimes compound growth recessions. To the extent that new technologies such as automation, robotics, and artificial intelligence facilitate increases in production and business profitability with less labor required, they can contribute to a growth recession. In this situation, production expands and corporate profits are strong, but employment and wages can stagnate.
How is a Growth Recession Different from a Typical Recession?
The traditional definition of a recession is a dramatic slowdown in economic activity across a variety of measures, including economic output (GDP), employment, retail sales and other key indicators. The simplest definition is two quarters of negative GDP growth. However, in a growth recession, the economy still grows, just not fast enough to generate enough jobs to absorb new people entering the labor market.
How Does a Growth Recession "Feel" Like a Typical Recession?
Because job creation is slow, people may still find themselves out of work, and a new job difficult to find. If inflation also exists but there is little incentive for companies to raise wages to attract workers, consumers' buying power may erode, so they experience the the same affects as they would during a recession.
What Causes a Growth Recession?
When the economy does not grow quickly enough to create enough new jobs for existing workers and people entering the workforce, that causes a growth recession. In the second quarter of 2011, U.S. real gross domestic product (GDP) grew 1.3%, but that was well below the 3% rate economists say is necessary to create jobs. Consumer spending, which accounts for 70% of the U.S. economy, rose a paltry 0.1% in that quarter, showing the impact slow growth can have on consumer spending, a major component of the U.S. economy.
The Bottom Line
A growth recession describes a situation in which the economy is still growing, but to the consumer it may "feel" like a recession. This is because although the economy is growing, it is not growing quickly enough to generate enough new jobs to absorb new workers entering the labor pool and to provide a steady supply of new opportunities for existing workers. Stagnant wages may erode consumer buying power even if inflation is low, increasing the recession-like effect.
Economists estimate the U.S. economy must grow 3% per year to create jobs. In the second quarter of 2011, U.S. real gross domestic product (GDP) grew just 1.3%, damping consumer spending growth (which accounts for 70% of the U.S. economy) to just 0.1%.
