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Going Beyond the BCDC Indicators: Can the Economy Avoid a Recession?

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.

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Going Beyond the BCDC Indicators: Can the Economy Avoid a Recession?

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  1. Going Beyond the BCDC Indicators: Can the EconomyAvoid a Recession? Robert J. Gordon Northwestern University and NBER NBER Board of Directors, BCDC Panel Cambridge, September 8, 2008

  2. 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

  3. 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

  4. Six-Month Change in Payroll Employment since 1955

  5. Same Time Interval for the Unemployment Rate

  6. Now Let’s Compare 2-qtrGrowth Rates of Outputand 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

  7. 2-qtr Change in Real GDPand Total-Economy Hours

  8. Compare 2-qtr and 8-qtr Growth of Total-Economy Labor Productivity

  9. 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

  10. Same 8-qtr Growth RateCompared to Trend Growth

  11. 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 2001-02 • Third, CPI Inflation • Fourth, How this Comes Together in Contributions to GDP

  12. Housing Starts, 1960-2008,Always a Leading Indicator

  13. Business Investment share of Nominal GDP

  14. CPI Headline and Core Inflation

  15. Contributions to Real GDP Growth since 2004

  16. 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”

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