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Twelfth Federal Reserve District
FedViews
Economic Research Department
Federal Reserve Bank of San Francisco
101 Market Street
San Francisco, CA 94105
November 14, 2013
Also available upon release at
http://www.frbsf.org/economic-research/publications/fedviews/
Bharat Trehan, research advisor at the Federal Reserve Bank of San Francisco, provides his views on current
economic developments and the outlook.
•
Our forecast is relatively unchanged from October, with real GDP projected to grow a bit more than
3% in 2014 and in 2015.
•
While prospects for economic growth have not changed much over recent months, they have changed
quite substantially over the past few years. In this FedViews, we take a closer look at these changes,
including how our forecast has evolved.
•
We start by looking at our predictions for the path of real GDP every January for the past four years.
Our 2010 and 2011 forecasts proved to be too optimistic, projecting that growth would rebound too
rapidly after the recession. Our 2012 and 2013 forecast trajectories have been considerably flatter and
appear to have matched actual output more closely.
•
So, why did we overpredict economic growth early in the recovery, and why are we predicting slower
growth now? Part of the answer to the first question lies in the unusually large negative demand
shocks that slowed the economy early in the recovery. The European debt crisis that began in late
2009 and intensified in 2010 pushed one of our major trading partners back into recession. The
Japanese earthquake and tsunami in 2011 delivered another major shock. And the U.S. government’s
fiscal retrenchment and 2011 debt ceiling crisis created more headwinds. All these events have
pushed down demand for U.S. products.
•
As significant as these demand shocks were, surprises on the supply side were at least as important in
restraining future growth and seem likely to persist. The financial crisis appears to have caused
extraordinarily deep-seated damage to the U.S. economy. One way to measure the extent of this
damage is to consider what would have happened if per capita output had grown at a constant rate
every quarter from 1955 onwards. Specifically, we consider the historical average growth rate from
1955 to 2004 extended through 2013. At the beginning of 2005, this historical average growth rate
would seem to have been a relatively safe bet for how much the economy would grow over the next
decade. Unfortunately, as the chart indicates, the deep recession has resulted in a gap between actual
per capita GDP and the historical trend that is noticeably larger in 2013 than ever before and is
showing no tendency to close.
•
As this comparison suggests, the financial crisis appears to have damaged the supply side of the
economy in a number of ways that have continued into the recovery. Prolonged durations of
unemployment have caused those out of work to lose skills, and many have become discouraged and
left the labor force. Business investment has been weak, which has damped the growth of the capital
stock. And productivity growth and net business formation have also slowed.
The views expressed are those of the author, with input from the forecasting staff of the Federal Reserve Bank of San Francisco.
They are not intended to represent the views of others within the Bank or within the Federal Reserve System. FedViews generally
appears around the middle of the month. The next FedViews is scheduled to be released on or before December 20, 2013.
•
The extent of the damage to the supply side of the economy became evident only gradually. By
October 2010, our estimate of what the economy could produce in 2013—given the capital stock, the
labor force, and our level of technology—was already about 6% below the estimate from the simple
historic trend. But, we were still underestimating the effects of the crisis and had not lowered
potential output enough.
•
One more development played a major role in the subsequent downward revision of our potential
GDP estimate: History changed. For example, in the middle of 2010, the Bureau of Economic
Analysis estimated that real GDP rose roughly ¾% from the end of 2006 to the end of 2009. Now,
though, the revised data show that real GDP fell close to 1¼% during that period. That is, estimates
of the state of the economy in 2010 simply did not reveal the extent of the damage to the supply side.
•
This helps us answer the second question posed earlier: Why are we predicting only a moderate
pickup in growth going forward? Our recognition of deep and fairly long-lasting damage to the
supply side of the economy, and the resulting downward revisions to our estimate of potential
growth, explain much of why our recent forecast paths have been flatter than they were early in the
recovery.
•
Of course, our current estimate of supply-side conditions or potential GDP could be revised lower.
There are other downside risks as well. Recent surveys show waning consumer confidence, which
could lead to slower consumption growth. Another risk is that business equipment spending may not
pick up. Orders for nondefense capital goods have fallen at nearly a 15% annual rate over the past
three months, reversing most of the gains of the prior three months. These orders provide information
about near-term business equipment spending and suggest that this category of spending is likely to
remain soft for a while. This is especially discouraging following the November 7 GDP report, which
showed that real equipment investment in the third quarter fell slightly below its first-quarter level.
•
Another big data release was the employment report for October. In the household survey, the
unemployment rate ticked up from 7.2% to 7.3%, while the labor force participation rate fell from
63.2% to 62.8%. This survey reflected the government shutdown, as furloughed government workers
were classified as “unemployed on temporary layoff.” However, the reliability of some of these data
may be questionable, partly because the government shutdown delayed data collection and partly
because some furloughed workers may have been incorrectly recorded as “employed, but absent from
work.” November data from the household survey should provide a clearer picture.
•
Data from the establishment survey look considerably better. Payroll employment rose by a largerthan-expected 204,000 in October, while data for the previous two months were revised to add
60,000 jobs. Over the past three months, the economy has created an average of nearly 202,000 jobs
per month. Furloughed government workers were considered employed in the establishment survey.
We continue to expect pickup in growth
GDP projections have flattened
Gross Domestic Product (GDP)
Real GDP and FRBSF Forecast Paths
Percent change at seasonally adjusted annual rate
$ trillions
%
Jan-11
5
FRBSF
Forecast
17
Jan-13
Jan-10
0
Nov-13
16
Q3
-5
07
08
09
10
11
12
13
14
15
-10
Economy’s behavior extremely unusual
Per Capita Real GDP
05 06 07 08 09
Source: BEA, FRBSF Staff
10
11
12
15
13
14
15
14
How unusual was not immediately evident
Proportional scale ($ thousands)
59
15%
Historical Trend*
Per Capita Real GDP
$ thousands
61
Historical trend
Potential as of
Oct 2010
42
15%
Potential as of
Oct 2013
30
Actual
Jan-12
Real GDP
56
9.1%
51
3.3%
21
Actual
1955 1962 1969 1976
Sources: BEA and FRBSF.
1983 1990 1997 2004 2011 15
*Trend calculated 1955:Q3-2004:Q4
Business data show lackluster investment
Nondefense Capital Goods (ex. Aircraft)
$ billions
70
Seasonally adjusted, 3-month moving average
New
Orders
Sep
65
Shipments
55
50
45
40
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Unemployment data affected by shutdown
Unemployment Indicators
%
11
Thousands
700
Unemployment Rate
(right scale)
650
600
60
46
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Sources: BEA and FRBSF.
9
FRBSF
Forecast
550
500
450
400
10
Initial Claims
(left scale)
8
7
Oct.
6
350
5
300
4
3
250
2003
2005
2007
2009
2011
2013
2015
Sources: Department of Labor; Bureau of Labor Statistics; FRBSF.
Payroll employment growth stabilizing
Nonfarm Payroll Growth
Thousands
250
Seasonally adjusted, 6-month moving average
Oct
200
150
100
50
2011
Source: BLS
2012
2013