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”