Depressing Chart of the Day

April 16, 2014

We hate to be the Debbie Downers of the day, but we just plotted the graph below and felt we should share it. It plots real GDP for the United States from 1970 to 2013 using a logarithmic scale. If the red line were straight, that would imply that real GDP grew at a constant rate from 1970 to 2013.

The black dots represent the trend using the pre-2007 data. In other words, we estimate the trend growth rate the U.S. economy was on prior to the 2007 recession. The difference between the red line and the black dots represents the deviation from trend for the U.S. economy.


Two things jump out. First, in all other recessions, we returned to trend pretty quickly. Second, the Great Recession has taken what looks like a permanent toll on the U.S. economy. We went way off trend. We are not catching up. And if anything, it looks like we are getting further away from trend.

We did a similar exercise using retail spending in a previous post. But the result is even more startling using GDP.

Like we said, sorry to be Debbie Downers.

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9 Responses to Depressing Chart of the Day

  1. James G on April 16, 2014 at 5:36 pmi

    Could you maybe plot this decade by decade. That is compute projected trends using data up to 1970, 1980,.. etc. That way we could get a better idea of how this deviation compares to past deviations.

    Aside from that, I’d be interested to hear your thoughts on whether potential GDP measurements are any good? Obviously the factories are still here, but we have mainly a service based economy that relies far more on human capital (at least in my opinion). Couldn’t it be the case that human capital depreciates at a much faster rate?

  2. Brian on April 16, 2014 at 10:25 pmi

    What’s the theoretical argument for why GDP growth should be constant over time? I realize that your pre 2008 data suggests that it’s a good approximation of reality, but why does the profession simply extrapolate this into the future? It seems as naive to me as extrapolating past investment returns into the future, which every prospectus I read says is a bad idea.

    If there is no theoretical reason why GDP growth should be constant going forward, then why do economists care about deviations from this straight line?

  3. Marko on April 16, 2014 at 10:45 pmi

    We would have fallen off the trend line in the early 2000s if not for the credit bubble. To a lesser degree , the same applies for the 1980s. When central bankers and politicians see that they might preside over the first significant deviation from that nice trend line since the Great Depression , it must be easy to justify borrowing ” just a little ” GDP growth from the future ( via debt and increased economy-wide leverage ).

    The trouble with this strategy is that you mask underlying problems in the economy , such as rampant inequality that depresses income-based aggregate demand , and as a result fail to deal with those problems. The other problem that arises is that eventually you arrive in the future from which you borrowed that gdp trend-smoothing growth , and find that the future ( aka “the present” , now ) wants its gdp back. That’s what that post-2007 slump is all about.

  4. OAH on April 17, 2014 at 12:43 ami

    Would it not be even more graphic to show this information on a per capita basis. It should clearly demonstrate that Americans (at least the bottom 99 per cent) are getting poorer.

  5. Simon W on April 17, 2014 at 1:48 ami

    I am even more depressed than you! you mention that we look to be moving further away from the trend as an aside but that strikes me as a central observation.

    The slope of the black line has been constant for a century but trend growth looks to be in a new world.

    What does your analysis and expertise say? The abatement of a debt build up that drove consumption growth above sustainable rates would surely result in slower potential growth going forward. Put another way, is the slope of the black line since 1970 representative of the growth in the supply side? Just pointing to the lack of inflation I believe is an insufficient answer.

  6. Frank on April 17, 2014 at 6:16 ami

    Government monetary policy and lending for consumer and commercial markets have been balanced through prior market downturns. In this case housing has been left on its own to recover. Plot the gap versus housing starts and it correlates. Government housing lending policy is not aggressive enough, but should it be? It got us in trouble in the first place.

  7. sahbfo on April 17, 2014 at 2:55 pmi

    How does GDP correlate to population growth and/or net immigration?

  8. Michael on April 17, 2014 at 8:32 pmi

    Cheer up! The same thing happened in the 1930s, but we got back to trend once the Great Depression ended. We always get back to trend!

  9. Al on April 18, 2014 at 5:37 ami

    Do either of you have thoughts on the same chart using nominal gdp?