Transcript Going Beyond the BCDC Indicators

Going Beyond the BCDC
Indicators: Can the Economy
Avoid a Recession?
Robert J. Gordon
Northwestern University and NBER
NBER Board of Directors, BCDC Panel
Cambridge, September 8, 2008
Looking Beyond the BCDC
Indicators: Two Questions

(1) Current Disconnect between the
Employment Decline and Continuing Real
GDP Growth
– Given Employment Behavior to Date, is there
any precedent in which a recession has been
avoided?
– Is Positive Real GDP Growth combined with
Declining Employment Unusual at this Stage of
the Business Cycle?

(2) A Brief Summary of Negative Factors for
Current and Future Real GDP Growth
Common Features to
All Graphs

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Vertical bars (as usual) indicate
previous recessions
All changes are over six months for
monthly data or two quarters for
quarterly data
All data are the latest releases,
including Friday’s employment report
Six-Month Change in Payroll
Employment since 1955
8
6
4
Percent
2
0
-0.65
-2
-4
-6
-8
1955
1960
1965
1970
1975
1980
1985
Year
1990
1995
2000
2005
Same Time Interval for the
Unemployment Rate
12
10
Percent
8
6
6.1
4
2
0
1955
1960
1965
1970
1975
1980
1985
Year
1990
1995
2000
2005
Now Let’s Compare 2-qtr
Growth Rates of Output
and Hours

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2-qtr growth rate for 2008:Q2 is 2.05
for real GDP and -0.34 for hours,
absolute difference 2.39. Has this
happened before?
Previous peak 2001:Q1, abs diff 1.53
Previous peak 1990:Q3, abs diff 1.61
So this time it’s a bit larger, but not
unprecedented
2-qtr Change in Real GDP
and Total-Economy Hours
15
10
Real GDP
Percent
5
2.05
0
-0.34
-5
Total-Economy Hours
-10
1955
1960
1965
1970
1975
1980
1985
Year
1990
1995
2000
2005
Compare 2-qtr and 8-qtr Growth of
Total-Economy Labor Productivity
10
8
Eight quarter growth rate
6
Percent
4
1.71
2
1.31
0
-2
Two quarter growth rate
-4
-6
1955
1960
1965
1970
1975
1980
1985
Year
1990
1995
2000
2005
Whether Productivity
Growth Turns Negative
Depends on the Trend

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Simple Arithmetic
If the LP trend is 3.0 percent per year and
actual LP growth falls 2.0 below trend, then
actual LP growth is positive
But if LP trend is 1.0 percent per year and
actual LP growth falls 2.0 below trend, then
actual LP growth is negative
Same 8-qtr Growth Rate
Compared to Trend Growth
4.5
4
3.5
Actual
3
2.5
2
1.61
1.5
1.31
1
Average of H-P and Kalman
Trends
0.5
0
-0.5
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Part 2: Let’s Look at
Negative Factors for
Future Real GDP Growth
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First, Housing Starts, key driver of
economic weakness in 2007-08
Second, Business Investment, key
driver of economic weakness in 200102
Third, CPI Inflation
Fourth, How this Comes Together in
Contributions to GDP
Housing Starts, 1960-2008,
Always a Leading Indicator
3,000
Number of Housing Starts
2,500
2,000
1,500
1,000
1,023
500
0
1960
1965
1970
1975
1980
1985
Year
1990
1995
2000
2005
Business Investment share
of Nominal GDP
16
14
Nonresidential Share
12
10.9
Percent
10
Producer Durable Equipment
Share
8
7.17
6
4
3.81
Nonresidential Structures Share
2
0
1955
1960
1965
1970
1975
1980
1985
Year
1990
1995
2000
2005
CPI Headline and Core
Inflation
16
Core CPI Inflation
14
12
10
Percent
Headline CPI Inflation
8
6.18
6
4
2.29
2
0
-2
1960
1965
1970
1975
1980
1985
Year
1990
1995
2000
2005
Contributions to Real GDP
Growth since 2004
6
5
Total GDP
4
Consumption
Percent
3
2.10
2
1.94
Residual
1
0.93
0.11
0
Net Exports
-0.87
-1
Residential Investment
-2
2004
2005
2006
2007
Year
2008
Conclusion: Will
Recession Occur?
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Strong Productivity Performance in 1990 and 2001
Recessions suggests Dilemma for BCDC
No Precedent to Avoid Recession Given Behavior to
Date of Employment and Unemployment
Housing, Credit Markets, Headline Inflation Sapping
Consumer Buying Power
Investment is often a lagging indicator and may
soon turn down
A Slow-Motion Train Wreck, with the emphasis on
“Slow”