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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 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 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 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 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? 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”