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The conventional wisdom is that recessions aren’t as bad as they used to be. But is the conventional wisdom flawed? Time “The bottom line is . . . That [m]ajor macroeonomic indicators have not become dramatically more stable between the pre-World War I and Post World War I eras, and recessions have become only slightly less severe on average. Recessions have, however, become less frequent and more uniform over time.”1 1 Christina Romer.“Changes in Business Cycles: Evidence and Explanations,” Journal of Economic Perspectives, 13(2), Spring 1999, p. 23. Romer claims that the GDP series most frequently used for comparisons of pre-World War I with postWorld War II cycles are excessively volatile because they were derived from data on the output of commodities (pig iron, coal, oil, wheat) . Most assumed that there was a one-to-one correspondence between output changes in these highly volatile industries and real GDP. Romer corrects for this defect and produces alternative estimates of real output. Dates of Peaks and Troughs 1 1886-1916 1920-1940 Trough 1948-1997 Peak Trough Peak Peak Trough 1887:2 1893:1 1887:7 1894:2 1920:1 1923:5 1896:1 1897:1 1927:3 1927:12 1957:8 1921:3 1948:11 1949:10 1924:7 1953:7 1954:5 1900:4 1900:12 1929:9 1932:7 1903:7 1904:3 1938:6 1969:12 1970:11 1907:7 1908:6 1939:12 1940:3 1973:11 1975:3 1910:1 1911:5 1980:1 1980:7 1914:6 1914:12 1981:7 1982:11 1916:5 1990:7 1991:3 1917:1 1937:8 1960:4 1958:4 1961:2 1Post World War II dates are identical to NBER dates. Pre-WWII dates are computed using the methodology described by Romer(1999, p. 29). Source: Romer (1999) Business Cycle Reference Dates in the U.S., 1919-1991 Trough Peak Trough Expansion in Months Mar 1919 Jan 1920 July 1921 10 18 July 1921 May 1923 July 1924 22 14 July 1924 Oct 1926 Nov 1927 27 13 Nov 1927 Aug 1929 Mar 1933 21 43 Mar 1933 May 1937 June 1938 50 13 June 1938 Feb 1945 Oct 1945 80 8 Oct 1945 Nov 1948 Oct 1949 37 11 Oct 1949 July 1953 May 1954 45 10 May 1954 Aug 1957 Apr 1958 39 8 Apr 1958 Apr 1960 Feb 1961 24 10 Feb 1961 Dec 1969 Nov 1970 106 11 Nov 1970 Nov 1973 Mar 1975 36 16 Mar 1975 Jan 1980 July 1980 58 6 July 1980 July 1981 Dec 1982 12 17 Dec 1982 July 1990 April 1991 88 9 Apr 1991 ? ? ?1 ? Source: Bureau of Economic Analysis 1101 months through August, 1999 Contraction in Months Index of Industrial Production P Green shaded area is cumulative loss, given by the sum of the percentage shortfall for each month from April 1960 to may 1961 T 100 0 Apr 1960 Feb 1961 May 1961 Year/Month Output Loss1 1886-1916 1920-1940 1948-1997 Year of Peak 1887 1893 Output Loss 57.8 260.1 Year of Peak 1920 1923 Output Loss 662.7 188.2 Year of Peak 1948 1953 Output Loss 117.4 122.5 1896 135.6 1927 67.9 1957 140.1 1900 80.1 1929 3120.0 1960 93.0 1903 115.5 1937 579.8 1969 98.0 1907 304.3 1939 64.7 1973 248.1 1910 153.3 1980 73.1 1914 74.6 1981 187.4 1916 46.3 1990 76.4 Ave. 136.4 Ave. 128.4 Ave. 780.5 1Output loss is the sum of the percentage shortfall of industrial production in each month between the peak and he return to the peak. It is measured in percentage points. Source: Romer (1999) Cycles differ in their duration and severity (though duration is obviously one aspect of the severity of a contraction). In examining cycles in comparative perspective, are there any discernible similarities or patterns? “Though there is absolutely no theoretical reason to anticipate it, one is led by the facts to conclude that, with respect to the qualitative behavior of co-movements among series, business cycles are all alike.” (Lucas 1981, p. 218). Robert E. Lucas. “Understanding Business Cycles,” reprinted in Studies in Business-Cycle Theory by Robert E. Lucas. Cambridge, MA: MIT Press, 1981, 215-239. “The regularities observed are in the co-movements among different [aggregate] time series, e.g. Output movements across broadly defined sectors move together (they exhibit high conformity). Production of producer and consumer durables exhibits much greater amplitude than production of nondurables. Production and prices of agricultural goods and natural resources have lower than average conformity. Business profits show high conformity and much greater amplitude than other series. Prices are generally procyclical. Short-term interest rates are procylical; long-term rates slightly so. Monetary aggregates are procyclical.” (Lucas, 1981, p. 217). Now we want to examine the behavior of key aggregate-level time series in the 1979-83 period in the U.S. Note that this period spans two full contractions (recessions) and one full expansion. Real GDP in the U.S., 1979-83 annual rate 5100 5050 5000 4950 4900 4850 4800 4750 4700 4650 4600 79.1 79.3 79.2 80.1 79.4 80.3 80.2 81.1 80.4 81.3 81.2 82.1 81.4 82.3 82.2 83.1 82.4 83.3 83.2 83.4 Yea r/Quar ter Source: Bureau of Economic Analysis Jan.80 is a peak; Jul. 80 is a trough; Jul. 81 is a peak; Dec. 1982 is a trough. Quarterly Change in GDP, 1979-83 annual rate 200 150 100 50 0 -50 -100 -150 -200 79/3 80/1 80/3 81/1 81/3 82/1 Year/Quarter Source: Bureau of Economic Analys is 82/3 83/1 83/3 Consumer Durable Spending, 1979-93 annual rate 360 350 340 330 320 310 300 290 280 270 260 79/4 80/2 80/4 81/2 81/4 82/2 Yea r/Quarter Source: Bureau of Economic Analysis 82/4 83/2 83/4 Gross Private Domestic Investment, 1979-83 annual rate 800 750 700 650 600 550 500 79/3 80/1 80/3 81/1 81/3 82/1 Yea r/Quar ter Source:Bureau of Ec onomic Analysis 82/3 83/1 83/3 Consumer Nondurable Spending, 1979-83 annual rate 1140 1120 1100 1080 1060 1040 79/3 80/1 80/3 81/1 81/3 82/1 Year/Quarter Source: Bureau of Economic Analys is 82/3 83/1 83/3 Consumer Spending for Services, 1979-83 annual rate 1900 1850 1800 1750 1700 1650 1600 79/3 80/1 80/3 81/1 81/3 82/1 Yea r/Quarter Source: Bureau of Economic Analysis 82/3 83/1 83/3 Imports and exports of the U.S., 1979-83 annual rate 360 350 340 330 320 310 300 Exports 290 79.3 Imports 80.1 80.3 81.1 81.3 82.1 Yea r/Quar ter 82.3 83.1 83.3 percent Quarterly Rate of Change of (Nominal) GDP and the Money S tock 1979-83 10 8 6 4 2 0 -2 -4 GNP -6 -8 M1 79/1 80/2 80/4 81/2 81/4 82/2 82/4 83/2 83/4 Yea r/Quarter Source: Bureau of Ec onomic Analysis and the F ederal Reserve of New York Yields of U.S. Tre asury Issues, 1979 -83 18 16 14 12 10 8 6 Mo.Treasury Bill 10-Y r Treas ury Bond 6 Oct 79 Jun 80 Feb 81 Oct 81 Jun 82 Feb 83 Oct 83 Mon th/Yea r Source: Federal Reserve of New York Now we want to examine the behavior of key aggregate-level time series in the 1990-91 recession. GDP in the U.S., 1989-93 annual rate 6400 6350 6300 6250 6200 6150 6100 6050 6000 89.3 90.1 89.4 90.3 90.2 91.1 90.4 91.3 91.2 92.1 91.4 Year/Quarter Source: Bureau of Economic Analysis July 90 is a peak; April 91 is a trough; 92.3 92.2 93.1 92.4 Consumption Expenditure in the U.S., 1989-93 annual rate 4300 4275 4250 4225 4200 4175 4150 4125 4100 4075 4050 4025 4000 89.3 90.1 89.4 90.3 90.2 91.1 90.4 91.3 91.2 Yea r/Quar ter 92.1 91.4 92.3 92.2 93.1 92.4 Investment, Exports, and Imports of the U .S., 1989-93 annual rate 900 850 800 750 700 650 Inve stmen t 600 EXPORTS 550 500 89.3 IMPORTS 90.1 89.4 90.2 90.3 91.1 90.4 91.3 91.2 92.1 91.4 Yea r/Quarter Source: Bureau of E conomic Analys is 92.3 92.2 92.4 93.1