Growth Recession

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.

Understanding Growth 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. However, people who are 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 was 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 on the sidelines. 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. Against that backdrop, consumer spending, which accounts for 70% of 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, in spite of gains in GDP, 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.