A Tale of Two American Economies

NEW YORK – While the United States recently reported 3.5% GDP growth in the third quarter, suggesting that the most severe recession since the Great Depression is over, the American economy is actually much weaker than official data suggest. But official measures of GDP may grossly overstate growth in the economy as they don't capture the fact that business sentiment among small firms is abysmal and their output is still falling sharply. Third quarter GDP - properly corrected for these factors - may have been 2% rather than 3.5%.

The story of the US is, indeed, one of two economies.  There is a smaller one that is slowly recovering and a larger one that is still in a deep and persistent downturn.

Consider the following facts. While America’s official unemployment rate is already 10.2%, the figure jumps to a whopping 17.5% when discouraged workers and partially employed workers are included. And, while data from firms suggest that job losses in the last three months were about 600,000, household surveys, which include self-employed workers and small entrepreneurs, suggest that those losses were above two million.

Moreover, the total effect on labor income – the product of jobs times hours worked times average hourly wages – has been more severe than that implied by the job losses alone, because many firms are cutting their workers’ hours, placing them on furlough, or lowering their wages as a way to share the pain.