April 19, 2010

Economics Group

John Silvia, Chief Economist

john.silvia@wellsfargo.com ! 704-374-7034
Azhar Iqbal, Econometrician
azhar.iqbal@wellsfargo.com ! 704-383-6805

Character of Recovery II: Differences Persist

Our economic recovery remains on a different path than prior recoveries. This frustrates job seekers and
policymakers that wish to replay the past. The globalization and specialization of production marches on.

Production: In Sync with Prior Recoveries Industrial Production

Index, Cycle Trough = 1
Industrial production fell sharply in the recession, but if we date the 1.16 1.16
Average of Last 7 Recoveries
recovery as starting in June 2009, we can see that the pattern of growth is 1.14 Industrial Production 1.14

slightly stronger than the past seven recoveries (top graph). The 1.12 1.12
manufacturing sector continues to make progress for both auto and non-
1.10 1.10
auto components. Over the past three months, there have been double-digit
gains in high-tech and an 8.7 percent gain in manufacturing, ex-high-tech. 1.08 1.08

The March ISM report indicated expansion in orders, production and 1.06 1.06

employment along with longer delivery times. Therefore, the outlook 1.04 1.04

remains positive for production. We do not see the case for a double-dip 1.02 1.02

recession.
1.00 1.00
Sales: On Track and not Far off the Usual Recovery Pace
0.98 0.98
Real manufacturing and trade sales have generally followed the typical -12 -9 -6 -3 0 3 6 9 12

recovery path, although the pace of sales growth remains below the
historical trend. Subpar sales are to be expected given the corrections Real Manufacturing and Trade Sales
Index, Cycle Trough = 1
needed in the American household balance sheet and the limitations on 1.14
Average of Last 7 Recoveries
1.14

credit given the new ethic of caution on the part of both borrower and 1.12 Real Manufacturing and Trade Sales 1.12

lender (middle graph). For 2010, our outlook is for real final sales growth of
1.10 1.10
less than 2 percent, which is down from the 2.5 percent of 2007 with much
of the weakness centered in personal consumption spending. 1.08 1.08

Employment: Economic Outlier, Political Problem, Policy Driver 1.06 1.06

The outlier in this pretty economic recovery picture is employment (bottom 1.04 1.04

graph). While recent months have seen a modest rise in jobs, there is
1.02 1.02
clearly a pattern of below-average job recovery as the economy has
improved. There are obviously two problems—supply and demand. 1.00 1.00

On the supply side, the United States has had an issue for years of an 0.98 0.98
-12 -9 -6 -3 0 3 6 9 12
oversupply of low- and semi-skilled workers and a shortage of high-tech
scientists and engineers. In an era of the closed U.S. economy of the
Nonfarm Employment
1950s—1960s, increases in U.S. production were met with increased Index, Cycle Trough = 1
1.06 1.06
demand for workers of all types, and, as such, the excess supply of
low/semi-skilled workers was not as apparent. Meanwhile, the immigration
1.04 1.04
of health professionals, engineers and scientists continued to make up for a
shortage of domestic professionals.
1.02 1.02
In the 21st century, we deal with the realities of a global trading/production
model. In this case, increases in U.S. domestic demand are not met by an
equal increase in domestic supply; instead, demand is satisfied by 1.00 1.00

increased imports. Therefore, domestic job growth lags. Yet, on the supply
side, many workers are unable to respond to changing skills demand as the 0.98 0.98

development of human capital often takes more time than the market Average of Last 7 Recoveries
Employment
desires. Therefore, many unemployed are unemployed longer because of a 0.96 0.96

mismatch of skills—not just due to weakness in final demand. -12 -9 -6 -3 0 3 6 9 12

Source: Federal Reserve Board, U.S. Dept. of Commerce, U.S. Dept. of Labor and Wells Fargo Securities, LLC
Wells Fargo Securities, LLC Economics Group

Diane Schumaker-Krieg Global Head of Research (704) 715-8437 diane.schumaker@wellsfargo.com

& Economics (212) 214-5070

John E. Silvia, Ph.D. Chief Economist (704) 374-7034 john.silvia@wellsfargo.com

Mark Vitner Senior Economist (704) 383-5635 mark.vitner@wellsfargo.com
Jay Bryson, Ph.D. Global Economist (704) 383-3518 jay.bryson@wellsfargo.com
Scott Anderson, Ph.D. Senior Economist (612) 667-9281 scott.a.anderson@wellsfargo.com
Eugenio Aleman, Ph.D. Senior Economist (612) 667-0168 eugenio.j.aleman@wellsfargo.com
Sam Bullard Economist (704) 383-7372 sam.bullard@wellsfargo.com
Anika Khan Economist (704) 715-0575 anika.khan@wellsfargo.com
Azhar Iqbal Econometrician (704) 383-6805 azhar.iqbal@wellsfargo.com
Adam G. York Economist (704) 715-9660 adam.york@wellsfargo.com
Ed Kashmarek Economist (612) 667-0479 ed.kashmarek@wellsfargo.com
Tim Quinlan Economist (704) 374-4407 tim.quinlan@wellsfargo.com
Kim Whelan Economic Analyst (704) 715-8457 kim.whelan@wellsfargo.com
Yasmine Kamaruddin Economic Analyst (704) 374-2992 yasmine.kamaruddin@wellsfargo.com

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