Growth Recession: What It Is, How It Works

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 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.

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%.