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Robert J. GordonRobert J. Gordon
Northwestern University and NBERNorthwestern University and NBER
NBER Board of Directors, BCDC Panel NBER Board of Directors, BCDC Panel
Cambridge, September 8, 2008Cambridge, September 8, 2008
Going Beyond the BCDC Going Beyond the BCDC Indicators: Can the Indicators: Can the
EconomyEconomyAvoid a Recession?Avoid a Recession?
Looking Beyond the Looking Beyond the BCDC Indicators: Two BCDC Indicators: Two
QuestionsQuestions (1) Current Disconnect between the (1) Current Disconnect between the
Employment Decline and Continuing Employment Decline and Continuing Real GDP GrowthReal GDP Growth– Given Employment Behavior to Date, is Given Employment Behavior to Date, is
there any precedent in which a recession there any precedent in which a recession has been avoided? has been avoided?
– Is Positive Real GDP Growth combined with Is Positive Real GDP Growth combined with Declining Employment Unusual at this Declining Employment Unusual at this Stage of the Business Cycle?Stage of the Business Cycle?
(2) A Brief Summary of Negative (2) A Brief Summary of Negative Factors for Current and Future Real Factors for Current and Future Real GDP GrowthGDP Growth
Common Features to Common Features to All GraphsAll Graphs
Vertical bars (as usual) indicate Vertical bars (as usual) indicate previous recessionsprevious recessions
All changes are over six months All changes are over six months for monthly data or two quarters for monthly data or two quarters for quarterly datafor quarterly data
All data are the latest releases, All data are the latest releases, including Friday’s employment including Friday’s employment reportreport
Six-Month Change in Six-Month Change in Payroll Employment Payroll Employment
since 1955since 1955
-8
-6
-4
-2
0
2
4
6
8
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Year
Per
cent
-0.65
Same Time Interval for Same Time Interval for the Unemployment Ratethe Unemployment Rate
0
2
4
6
8
10
12
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Year
Per
cent
6.1
Now Let’s Compare 2-qtrNow Let’s Compare 2-qtrGrowth Rates of OutputGrowth Rates of Output
and Hoursand Hours 2-qtr growth rate for 2008:Q2 is 2.05 2-qtr growth rate for 2008:Q2 is 2.05
for real GDP and -0.34 for hours, for real GDP and -0.34 for hours, absolute difference 2.39. Has this absolute difference 2.39. Has this happened before?happened before?
Previous peak 2001:Q1, abs diff 1.53Previous peak 2001:Q1, abs diff 1.53 Previous peak 1990:Q3, abs diff 1.61Previous peak 1990:Q3, abs diff 1.61 So this time it’s a bit larger, but not So this time it’s a bit larger, but not
unprecedentedunprecedented
2-qtr Change in Real GDP2-qtr Change in Real GDPand Total-Economy Hoursand Total-Economy Hours
-10
-5
0
5
10
15
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Year
Perc
ent
Real GDP
2.05
-0.34
Total-Economy Hours
Compare 2-qtr and 8-qtr Compare 2-qtr and 8-qtr Growth of Total-Economy Labor Growth of Total-Economy Labor
ProductivityProductivity
-6
-4
-2
0
2
4
6
8
10
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Year
Perc
ent
Two quarter growth rate
Eight quarter growth rate
1.31
1.71
Whether Productivity Whether Productivity Growth Turns Negative Growth Turns Negative Depends on the TrendDepends on the Trend
Simple ArithmeticSimple Arithmetic If the LP trend is 3.0 percent per year If the LP trend is 3.0 percent per year
and actual LP growth falls 2.0 below and actual LP growth falls 2.0 below trend, then actual LP growth is positivetrend, then actual LP growth is positive
But if LP trend is 1.0 percent per year But if LP trend is 1.0 percent per year and actual LP growth falls 2.0 below and actual LP growth falls 2.0 below trend, then actual LP growth is trend, then actual LP growth is negativenegative
Same 8-qtr Growth RateSame 8-qtr Growth RateCompared to Trend Compared to Trend
GrowthGrowth
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Actual
Average of H-P and Kalman Trends
1.31
1.61
Part 2: Let’s Look at Part 2: Let’s Look at Negative Factors for Negative Factors for
Future Real GDP GrowthFuture Real GDP Growth First, Housing Starts, key driver of First, Housing Starts, key driver of
economic weakness in 2007-08economic weakness in 2007-08 Second, Business Investment, key Second, Business Investment, key
driver of economic weakness in driver of economic weakness in 2001-022001-02
Third, CPI InflationThird, CPI Inflation Fourth, How this Comes Together Fourth, How this Comes Together
in Contributions to GDPin Contributions to GDP
Housing Starts, 1960-Housing Starts, 1960-2008,2008,
Always a Leading Always a Leading IndicatorIndicator
0
500
1,000
1,500
2,000
2,500
3,000
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Year
Num
ber o
f Hou
sing
Sta
rts
1,023
Business Investment Business Investment share of Nominal GDPshare of Nominal GDP
0
2
4
6
8
10
12
14
16
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Year
Perc
ent
10.9
7.17
3.81
Producer Durable Equipment Share
Nonresidential Share
Nonresidential Structures Share
CPI Headline and Core CPI Headline and Core InflationInflation
-2
0
2
4
6
8
10
12
14
16
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Year
Perc
ent
Core CPI Inflation
Headline CPI Inflation
2.29
6.18
Contributions to Real Contributions to Real GDP Growth since 2004GDP Growth since 2004
-2
-1
0
1
2
3
4
5
6
2004 2005 2006 2007 2008
Year
Perc
ent
Net Exports
Residential Investment
Consumption
Total GDP
Residual
0.93
1.94
0.11
2.10
-0.87
Conclusion: Will Conclusion: Will Recession Occur?Recession Occur?
Strong Productivity Performance in 1990 and Strong Productivity Performance in 1990 and 2001 Recessions suggests Dilemma for BCDC2001 Recessions suggests Dilemma for BCDC
No Precedent to Avoid Recession Given No Precedent to Avoid Recession Given Behavior to Date of Employment and Behavior to Date of Employment and UnemploymentUnemployment
Housing, Credit Markets, Headline Inflation Housing, Credit Markets, Headline Inflation Sapping Consumer Buying PowerSapping Consumer Buying Power
Investment is often a lagging indicator and Investment is often a lagging indicator and may soon turn downmay soon turn down
A Slow-Motion Train Wreck, with the A Slow-Motion Train Wreck, with the emphasis on “Slow”emphasis on “Slow”
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