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In the first quarter of 2018, the demand for goods and services (actual GDP) was roughly $29 billion (about 0.1 percent) below the Congressional Budget Office’s (CBO) estimate of what the economy was capable of supplying (potential GDP). This suggests that the output gap between actual and potential GDP, which was manifested in excess unemployment and underemployment and idle productive capacity among businesses, has nearly closed.

In its April 2018 Budget and Economic Outlook, CBO projects that actual GDP will exceed potential this year and next but will slow thereafter. CBO does not try to forecast business-cycle fluctuations, but instead assumes that eventually real GDP growth will reflect underlying trends in the economy’s capacity to produce goods and services and, while growing at the same rate, the level of actual GDP will be 0.5 percentage points lower than that of potential GDP, which is the average historical gap.

GDP rose at a 2.3 percent annual rate in the first quarter of 2018 and was 2.9 percent higher than in the same quarter a year ago. The latter figure exceeds the 2.2 percent average annual growth since the start of the recovery. Job Losses Were Unprecedented

The sharp rise in the unemployment rate and discouragement over the prospects of finding a job caused a decline in the percentage of the population in the labor force (those either working or looking for work). As a result of rising unemployment and declining labor force participation, the percentage of the population with a job fell sharply in the recession and stayed low through much of the recovery. It began to move up in 2014 and 2015 as falling unemployment offset still-falling labor force participation. The labor force participation rate averaged 62.8 percent in 2017 and was 62.8 percent in April; the employment-to-population ratio averaged 60.1 percent in 2017 and was 60.3 percent in April. The fall in the unemployment rate in April reflected a drop of 239,000 in the number of people unemployed, a drop in the labor force of 236,000, and an increase in the number of people with a job of only 3,000.

The employment-to-population ratio shown in the chart is for those aged 16 and older and includes an increasing number of retired baby boomers. Thus, a significant percentage of the shortfall from its level at the start of the recession reflects demographic trends rather than labor market weakness. While this rate remains 2.4 percentage points lower than it was at the start of the recession, the employment-to-population ratio for those in their prime working years (age 25-54), which fell 4.9 percentage points between the start of the recession and December 2009, has recovered all but 0.5 percentage points of that loss and was 79.2 percent in April. Long-Term Unemployment Rose to Historic Highs

Average hourly earnings of employees on private payrolls grew modestly through much of the recovery, and to date have averaged 2.2 percent annually. Inflation has been modest as well, but over much of the economic recovery, real (inflation-adjusted) wages hardly grew and have failed to keep up with increases in workers’ productivity (output produced per hour of work).

As a result, the share of national income going to profits rose relative to that going to wages. Both inflation and productivity have fluctuated more than nominal earnings during this period, but, on average, productivity has risen at roughly 1 percent per year from the end of the recession through the first quarter of 2018 and the cost of a typical worker’s market basket has risen about 1¾ percent per year over the same period.

The pace of wage growth quickened in 2015 and into 2016, but has subsequently stalled at about 2.6 percent. In March 2018, average hourly earnings of all employees on private payrolls were 2.6 percent higher than a year earlier (earnings of non-management employees were also up 2.6 percent). Low inflation in 2015 and 2016 led to solid real wage gains, but strong nominal wage growth will be required to maintain such gains if inflation rises further. The Number of People Looking for Work Swelled Compared with the Number of Job Openings

At one point at the beginning of the recovery there were 7 people looking for work for every job opening. That ratio has declined substantially and is now near its historic low just before the 2001 recession in data that go back to December 2000. In March 2018, 6.6 million workers were unemployed, compared with 6.6 million job openings (a ratio of about 1 job seeker for every job opening). Part III: The Great Recession Would Have Been Even Worse without Financial Stabilization and Fiscal Stimulus Policies GDP Would Have Been Lower Without the Recovery Act…

The Recovery Act was designed to boost the demand for goods and services above what it otherwise would be in order to preserve jobs in the recession and create them in the recovery. The Congressional Budget Office finds that GDP has been higher each year since 2009 than it would have been without the Recovery Act (with the largest impact in 2010 when GDP was between 0.7 and 4.1 percent higher than it otherwise would have been). The impact diminished, as expected, as the economy recovered, but CBO estimates that even at the end of 2012 GDP was between 0.1 and 0.6 percent larger than it would have been without the Recovery Act.