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

Looking Beyond the BCDC Indicators: Two Questions (1) Current Disconnect between the Employment Decline and Continuing Real GDP Growth (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 (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 Vertical bars (as usual) indicate previous recessions All changes are over six months for monthly data or two quarters for quarterly data 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 All data are the latest releases, including Friday’s employment report

Six-Month Change in Payroll Employment since 1955

Same Time Interval for the Unemployment Rate

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 for hours, absolute difference Has this happened before? 2-qtr growth rate for 2008:Q2 is 2.05 for real GDP and for hours, absolute difference Has this happened before? Previous peak 2001:Q1, abs diff 1.53 Previous peak 2001:Q1, abs diff 1.53 Previous peak 1990:Q3, abs diff 1.61 Previous peak 1990:Q3, abs diff 1.61 So this time it’s a bit larger, but not unprecedented So this time it’s a bit larger, but not unprecedented

2-qtr Change in Real GDP and Total-Economy Hours

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

Whether Productivity Growth Turns Negative Depends on the Trend Simple Arithmetic 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 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 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

Part 2: Let’s Look at Negative Factors for Future Real GDP Growth First, Housing Starts, key driver of economic weakness in First, Housing Starts, key driver of economic weakness in Second, Business Investment, key driver of economic weakness in Second, Business Investment, key driver of economic weakness in Third, CPI Inflation Third, CPI Inflation Fourth, How this Comes Together in Contributions to GDP Fourth, How this Comes Together in Contributions to GDP

Housing Starts, , Always a Leading Indicator

Business Investment share of Nominal GDP

CPI Headline and Core Inflation

Contributions to Real GDP Growth since 2004

Conclusion: Will Recession Occur? Strong Productivity Performance in 1990 and 2001 Recessions suggests Dilemma for BCDC 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 No Precedent to Avoid Recession Given Behavior to Date of Employment and Unemployment Housing, Credit Markets, Headline Inflation Sapping Consumer Buying Power Housing, Credit Markets, Headline Inflation Sapping Consumer Buying Power Investment is often a lagging indicator and may soon turn down Investment is often a lagging indicator and may soon turn down A Slow-Motion Train Wreck, with the emphasis on “Slow” A Slow-Motion Train Wreck, with the emphasis on “Slow”