Economy Falling Years Behind Full Speed

By V-J Day in 1945, the economy, propelled by war spending, was operating beyond what the experts thought of as full capacity, demonstrating the “squishiness” of the concept, as Mr. Gordon put it. Just the swing from one to three shifts alters capacity, he said, and so does the more intensive use of floor space.

Capacity stretched again in the 1950s and ’60s, to feed demand created by the wars in Korea and Vietnam, and then again in the late 1990s, propelled by the dot-com boom. And there were downdrafts as recessions sapped demand, but none as punishing as the current one.

Sixteen months into this recession, the economy is operating at 7 percent below its potential capacity, the Congressional Budget Office reported last month. If that were to continue, today’s $14 trillion economy would be a $13 trillion economy by this time next year.

Labor is contributing hugely to the shortfall. More than 24 million men and women, or 15.6 percent of the labor force, are either hunting for work or working fewer hours than they would like to work, or are too discouraged to seek work, although they would take jobs if offered them, the Bureau of Labor Statistics reports.

The ranks of this “underutilized” group — the bureau’s label — are up by 10 million since early last year. Generating work for so many people would take several years, even if the nation’s employers stopped shedding more than 600,000 jobs a month, as they have done since December, and began hiring robustly.

“We have rarely been in this deep a hole,” said Nigel Gault, chief domestic economist for IHS Global Insight.

His concern is that nearly every nation — not just the United States — is suffering from idle capacity as the recession that started in America grips Europe and Asia. Struggling for sales in a marketplace swamped with goods and services, companies are cutting prices and shutting down operations, trying to keep supply in line with dwindling demand.

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The cutback is particularly severe in the auto industry, which had the capacity, going into the recession, to make nearly twice as many cars in the United States as are now being sold here. Indeed, some of the factories being closed are unlikely to ever reopen.

“Eventually, once this recession is over, we will fill up capacity,” Mr. Gault said. “Not only that, capacity itself will inevitably expand as the labor force grows and innovation kicks in. But the new capacity won’t be as great as it would have been if we had not gone through this terrible experience.”

This story originally appeared in The New York Times

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