A Chart that Demands Attention

Neil Irwin at the New York Times (The Upshot) writes that “no one cares about economic data anymore” which he says is “good news.” He points to some indisputable facts, such as the steady growth in both employment and GDP over the past few years. His focus is mostly on short-run monthly or quarterly movements in economic data–movements that perhaps we can safely ignore in the near future.

The GDP numbers for the first quarter of 2014 were released yesterday, and GDP growth was way below forecast. Bad winter weather was the likely culprit, and we agree with Irwin that we are no longer seeing the short-run gyrations in GDP numbers that we saw in the 2006 to 2010 period.

But over a longer horizon, there is something deeply puzzling about the GDP numbers, and economists everywhere should be staring at them and scratching their heads. The chart below shows why. It plots real GDP for every U.S. post-World War 2 recession for 26 quarters after the recession. Each line is indexed to 100 in the quarter before the official NBER start of the recession. The steeper the line for the particular recession, the stronger the recovery.



It is true that the recovery in GDP has been steady over the past couple of years – but it’s been steadily disappointing. The recovery out of the Great Recession looks dismal compared to earlier recoveries–we aren’t even close to the recoveries we’ve seen before. The short-run gyrations are gone, but the longer run issue of dismal growth is as important as ever.

Why has the recovery been so dismal? This has to be one of the central research questions for macroeconomics going forward. We have several candidates: (1) secular stagnation, (2) structural changes in the economy such as demographics (3) a Gordonesque pessimism on productivity growth (4) weak government spending, (5) heightened policy uncertainty, and (6) excessively tight monetary policy. These aren’t mutually exclusive.

But whatever your views, this is not a boring chart. Quite the opposite. This chart demands attention – and further research.

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39 Responses to A Chart that Demands Attention

  1. BananaGuard on May 1, 2014 at 7:29 ami

    Don’t we already have a good bit of evidence on some of these? The zero bound has meant the Fed necessarily ran policy tighter than any Taylor rule variant would prescribe. Fiscal policy was contractionary. There may be questions about the extent of the effect of these, and interaction between these and others, but aren’t we farther along in understanding what happened than you suggest?

  2. Paul Andrews on May 1, 2014 at 7:46 ami

    The real question is, why frame it this way?

    An open-minded analysis would include the obvious options
    (7) excessively loose monetary policy
    (8) high debt overhang (gov & pvt)

    • BananaGuard on May 1, 2014 at 9:19 ami

      Implicitly, high debt overhang is included, as a possible cause of secular stagnation. An “open minded” analysis is not required to accommodate every alternate opinion. There is a claim that higher rates would stimulate growth, but I’m not aware of any evidence in the long-term historic record that supports recent up-side-down monetary thinking. An open-minded analysis won’t necessarily be spmething you like.

      • Paul Andrews on May 1, 2014 at 7:20 pmi

        You are ignoring the fact, as verified by the BOE and some Fed economists, that loose monetary policy has increased inequality. This possibly has long term effects on growth, as those who create the growth are not rewarded in proportion with their cobtribution. It’s not just about short run effects of interest rates.

        • Paul Andrews on May 2, 2014 at 2:33 ami

          An open minded analysis is not required to canvas every alternative, but if it leaves out obvious and well-publicized alternatives, while including an exact opposite of one of these, then it’s safe to conclude that the authors are attempting to frame the debate to suit a certain agenda.

        • BananaGuard on May 2, 2014 at 7:18 ami

          You are using cheap rhetorical tricks to make a splash. You have no way of knowing whether I’ve considered longer-term distributional effects. I wrote a total of 6 lines. So nice try. Falling back on longer-term arguments when the problem in front of us is the failure of the economy to grow well right now looks like you are, well, as I already said, looking for a rhetorical trick to score points.

          • Paul Andrews on May 3, 2014 at 1:35 ami

            A balanced policy cannot ignore the long run. After all, today’s problems are largely the result of measures taken in decades gone by. They weren’t caused wholly by things we did in the recent past.

    • Creditrider on May 2, 2014 at 8:02 ami

      I would add another, and to me, one of the most important:
      9) income inequality. The wealthy save as they already have everything and the poor just cannot afford.

      • Paul Andrews on May 3, 2014 at 1:30 ami

        Yes, keeping in mind that excessively loose monetary policy may be a significant contributor to income equality.

  3. Dave on May 1, 2014 at 8:00 ami

    Tight monetary and fiscal policy in collaboration with much higher inequality.

    • philosophking on May 1, 2014 at 2:54 pmi

      ^Yes, particularly inequality, which attained pre-Great Depression levels right around 2006/2007 and we haven’t done anything about it since (except the healthcare reform which might make a small dent by relieving health care costs for the lower and some middle class).

  4. Ying on May 1, 2014 at 8:55 ami

    Maybe economists should first explain to us non-economists why growth is the most important issue of economics. Everything else being equal, shouldn’t people be just as satisfied with a level GDP every year? That is, without inflation, or an individual desire to make more money, one should be OK, though not feeling terrific about, with a world that makes them no worse off, right? Why must GDP be greater starting on a new calendar year? Another question along that line is: with a flat population and technological growth, shouldn’t economists expect that the GDP growth slows to a crawl, because there is a human possible limit on the productivity? Now return to the current question we take for granted. With the tech bubble and house bubble gone bust, I do not see a strong driver for the GDP to grow any faster. Where do you categorize this lack of growth?

    • BananaGuard on May 1, 2014 at 9:59 ami

      There are all kinds of reasons for focusing on growth, few of which address the point you make.

      Economics became a field of study during the part of history in which growth has been most rapid. Economics has thus grown up focused on growth. Economics, known as “political economy” in its early days, is very much entangled with policy, and politicians are in charge of policy. They have made growth something they “deliver” to the rest of us. (We know better, but what we know and what we act on in the political sphere can be quite different.) Since we and our parents and their parents and their parents have lived in a time of historically rapid economic growth, we have built our lives and institutions around the assumption of continued growth. Social Security, 30-year bonds, pensions, “majestic, self-amortizing canals”, all depend on growth. The transition from growth to stasis is painful. Japan has learned that, and large parts of the US public has been learning it.

      To the extent that the benefits of output growth (as opposed to technological advancement) fall more and more to the few, there is less reason for the many to demand growth.

  5. david s on May 1, 2014 at 12:11 pmi

    The crisis economically wrecked many, many households. Very little was done, really almost nothing at all, to help make them whole.

    A failure of fiscal policy. We are governed by the weak and the stupid.

    • philosophking on May 1, 2014 at 2:55 pmi

      “We are governed by the *rich* and the stupid.”


  6. Xenophon on May 1, 2014 at 12:16 pmi

    I think these questions demand a greater purview. Economists ought to start taking a look at social conditions to understand trends. Consider that if business investment is controlled by the wealthy upper class, and they decide to turn earnings into dividends rather than business growth, then you have a stagnant economy.

    I understand that hyper mathematical models are fun to play around with, but is it really that far fetched of an idea that our economy is shaped by the largest owners of property (ie corporations, land etc etc)? Consider their influence on economic policy, from businesses to government.

  7. tew on May 1, 2014 at 2:52 pmi

    That graph is misleading. Each series should be normalized by comparing to potential GDP. This would take the form of plotting the output gap rather than simply real GDP levels. This is important, since potential GDP growth has fallen over time.

    I would say that each series should use the forecast of potential GDP that existed the quarter before the recession rather than later estimates. That way the calculated output gap would include any hysteresis effects from the recession.

    • Richard on May 2, 2014 at 9:50 ami

      “This is important, since potential GDP growth has fallen over time.”

      Any evidence to support this assertion?

      I’m sure you’re aware of the long-term growth rate of the US since the mid-19th century or so.

      • tew on May 3, 2014 at 11:45 ami

        Yes Richard, I’m aware. I’m aware that we would not use a very long run average as a common baseline for a set of short-term events widely spaced in time. Instead, as I suggest, it would be correct to baseline each event against its near-term conditions.

        As one can see in this FRED chart the growth rate in potential real GDP has steadily and meaningfully declined since WWII. (Change Graph Settings to log in order to clearly see the change in percentage growth.) This is “natural” and there are plenty of economists who can explain it.


        Recessions and recoveries can only be properly understood by looking at the output and employment gaps vs. potential.

        (Also, as I mention, ideally the gap would include any hysteresis effects that capture damage to potential growth from the recession itself. There is some evidence that this effect has been more pronounced during the period since the most recent recession.)

        • Marko on May 4, 2014 at 8:58 pmi

          Real per capita gdp growth might have been better than real gdp for the subject post graph , since the rate of real per capita growth has been pretty stable from ~1965 until 2007. However , since 2007 , real per capita growth is on a new , lower trajectory just as for real gdp , so the conclusions of the subject post would still hold.

          Potential real gdp has its own set of problems. The CBO estimates , used by FRED , have been continually revised downward since 2007 , presumably so as to generate a target that we have some outside chance to hit , maybe. ( if not , CBO will simply revise again , and again , and ….) :


  8. Dan on May 1, 2014 at 3:13 pmi

    Agreed, it is not boring.
    It is hard to escape from the tautological component of this chart however. Or its property of being an identity as defined.
    Government spending is a part of GDP; Government spending has been a drag on GDP.
    This is a simple identity. as is each component.
    More investment, more consumption, or more government, or more of some blend of all three (adjusting for net exports) would naturally have produced more GDP, by definition.

    Now we all know this is economics which means you can’t prove anything definitively, however, asking the right question would be a good start. Show the same chart for each of the four components of GDP and ask your question for why each component looks as it does relative to itself for each of the prior recoveries.

    Econ 101: government counter-cyclical
    This recovery: government not counter-cyclical


  9. Bruce on May 1, 2014 at 3:45 pmi

    “This time is different” – Oh wait, there is a clear temporal trend here, the rate of growth diminishes with each recession. Why is that true, irrespective of “this time is different”?

  10. RCA on May 1, 2014 at 3:47 pmi


  11. Michael on May 1, 2014 at 7:10 pmi

    I believe the answer you are looking for is contained in the following graph:


    The two drivers of the economy are wages and borrowing. This graph seems to prove the point pretty convincingly. Here is my more detailed expaination:


  12. LosGatosCA on May 1, 2014 at 8:26 pmi

    The whole inequality of income/wealth distribution seems like a no brainer.

    It’s hard for the concentrated wealth to trickle down from the Cayman Islands.

    The whole velocity of wealth effect on aggregate demand just seems like an area for obvious research. And it’s not just people. Why does Apple have $147B in cash that’s just sitting idle?

  13. Jac kie C on May 1, 2014 at 8:52 pmi

    Offshore outsourcing?

  14. Lee on May 1, 2014 at 9:04 pmi

    Would you be willing to send over your data? It would be interesting to try out some tests (significance tests on the slope, MCMC simulations, etc.) to see empirically how far off this recover is.

    Is it within the expected variation? Could recovery be driven more by randomness than any real difference? Just a superficial look at that regression suggests that we have a low sample size of long-recoveries – our own current recovery could still fall within the 95% confidence level assuming it shares the same dynamics of past recessions.

  15. Pat on May 2, 2014 at 2:46 ami

    Aren’t we calling it the Lesser Depression now, rather than the Great Recession? It’s not like the economy is technically in recession, nor has been for most of the past five years. But as the chart shows, “depression” is definitely the right word.

  16. Jay on May 2, 2014 at 5:14 ami

    Care to graph the growth in the population between the ages of 20 and 64 in each one of these recoveris?

  17. JBH on May 2, 2014 at 6:48 ami

    You ask the important question. But your tentative answers belies your lack of understanding. Until you jettison the theoretical model of Keynesianism, you will only by chance come upon the real causes. (1) Secular stagnation is not a cause. It is a description of the symptom. (2) Of course the economy is undergoing wrenching structural change. But demographics is not primary nor even tertiary. (3) Gordon’s ideas are solid. But pessimism on productivity growth is in itself not a root cause. (4) Weak government spending? I laugh. The growing size of government is draining vitality. Everyone except academics know it. Let me say this another way. Beyond a certain optimal point – passed decades ago – the long-term fiscal multiplier is strictly <0. (5) Heightened policy uncertainty is a symptom you choose to clothe as cause. (6) Tight monetary policy? Greatest creation of base money in all recorded history. Zero interest rates. You’ve got to be kidding!

    Look to the correct one-half of P. Andrews’s response, and to that of Jac Kie C, for two of the key causes. But even here, you must go deeper. Reflect on this remark: “Consider that if business investment is controlled by the wealthy upper class.” Reframe as follows. A miniscule fraction of a fraction of humanity with preponderant great wealth concentrated in banking long ago gained control of the levers of power in Western civilization. On plan, this cabal is draining the lifeblood from the victim – the working middle class – to attain their long-in-place goal of One World Order and supranational global government, by manipulating the media, educational system, parliaments, and most of all the disconnected monetary part of the economy, with presidents, prime ministers, central bankers, and Treasury ministers firmly in their pocket doing their bidding. Secretly behind closed doors. Voters being clueless. Xenephon is dead on: you should take a greater purview. I point to what you will find when you do.

    • Richard on May 2, 2014 at 9:55 ami

      “The growing size of government is draining vitality.”

      What growing size?

      “Everyone except academics know it.”

      No evidence to support your position (as expected).

      ” Beyond a certain optimal point – passed decades ago – the long-term fiscal multiplier is strictly <0."

      Again, no evidence to support your pet theory.

      "On plan, this cabal is draining the lifeblood from the victim – the working middle class – to attain their long-in-place goal of One World Order and supranational global government, by manipulating the media, educational system, parliaments, and most of all the disconnected monetary part of the economy, with presidents, prime ministers, central bankers, and Treasury ministers firmly in their pocket doing their bidding."

      You do realize that this "cabal" is, on the whole, much against Keynesian measures, fiscal stimulus, & monetary stimulus, don't you?

      • Michael on May 2, 2014 at 11:12 ami

        Amazing how billionaires have been able to buy media outlets and thoroughly confuse the issues, isn’t it?

        P.S. JBH, total government spending is back to 34% of GDP – the same as it was under Reagan.


  18. David Brown on May 2, 2014 at 12:11 pmi

    America came out of the recession in June 2009 in a fairly normal recovery. Obama announced hid health care initiative and the recovery stopped. I don’t believe that was the only factor but I certainly believe that policy uncertainty has a major negative impact. In my youth I did major project analysis for a Fortune 100 company. Business has a return on capital of 12-14%, which means that you have to project out 5-10 years with some degree of certainty. Unfortunately I wouldn’t now know how to project consumer demand because I wouldn’t know how much money they would lose to additional healthcare fees and taxes. I wouldn’t be able to project labor costs because I wouldn’t know what we were going to pay for healthcare (basically the second largest labor expense). I wouldn’t know what to project for tax rates or allowable depreciation because someone has to pay and, being unable to vote, the politicians are undoubtedly going to download costs on employers. The problem is not initiatives like Obamacare itself but rather the lack of definition. If you tell me costs are going to double I can at least model that and determine which projects remain viable. However, four years later, policians are still aren’t coming clean on costs and are deferring all of the negatives for political reasons, you are left with nothing but uncertainty. Yes, if I can make 100 a month and every month someone demands 110 I will invest despite the uncertainty. However, when capacity is 100 and demand is 90, I would normally be planning investment but, under the current uncertainty, I would defer.

    • Richard on May 2, 2014 at 3:40 pmi

      “Unfortunately I wouldn’t now know how to project consumer demand because I wouldn’t know how much money they would lose to additional healthcare fees and taxes. I wouldn’t be able to project labor costs because I wouldn’t know what we were going to pay for healthcare (basically the second largest labor expense). I wouldn’t know what to project for tax rates or allowable depreciation because someone has to pay and, being unable to vote, the politicians are undoubtedly going to download costs on employers.”

      Then you’re a poor analyst.

      We’ve had far more uncertainly in the past (for instance, the total cost of the Vietnam War when it seemed like it would drag on forever in the ’60′s or whether Volcker could bring down inflation in the ’80′s).

    • Richard on May 2, 2014 at 3:43 pmi

      Also, the recession of 2008-2009 was not a “normal” recession. Almost all post-war recessions until recently had been interest rate recessions deliberately caused by the Fed in order to rein in inflation. 2008-2009 was due to a credit crisis, whih means you are left with more debt overhang.

  19. James G. Long on May 2, 2014 at 8:39 pmi

    Investors are a savvy lot. Markets can move before economic trends are obvious.

    Obama had radical Marxist parents and mentors, and radical and criminal associates. What would a self-respecting investor do when faced with the possibility of the inefficiency, incompetence, and corruption of a Marxist president? Would he move to protect his assets?

    The national debt was already distorting the economy due to the Democrat’s Unaffordable Housing Project when Obama began his presidential campaign. At every step of the electoral process, campaign victories, nomination, election, and inauguration, investors bailed step by step as Obama moved forward. Investors continued to bail after the election, and the result was the Great Recession, joined in by Europe and the rest of the world. The investors got out early and massively, and pension and retirement funds were left holding a greatly reduced bag.

    Ben Bernanke was considered the greatest student of the Great Depression and seemed the ideal candidate to take over the Fed. What Bernanke learned from the Great Depression was that lack of liquidity destroyed banks, people, and the economy, so Bernanke made sure there was plenty of liquidity — QE1, QE2, QE3 …

    Unfortunately, investors were not protecting themselves from illiquidity, investors were protecting themselves from the Marxist psychopath in the White House. Google “Marxists and Markets Don’t Mix” written in the first week of the Obama presidency.

  20. Jack Vance on May 3, 2014 at 3:14 ami

    I would point out that GDP generally follows population and that very significant population increases have happened over the course of the last recession. Just in terms of immigration we have added some 8 million people to the US population since 2008 (1.1 million per year). The secular native birthrate has added a similar number. Thus the population has grown by 16 million or about 5% of the starting level. If each additional person contributed an average level of economic output, then the GDP would have also risen by 5% since 2008. This means that the observed increase since 2008, which is almost exactly 5% is totally a result of population change. It is caused by a scaling up of the size of the economy but without any increase in the living standard or in the income of individual workers. This is why the observed growth of GDP is not perceived as being a “true” recovery by the average individual. In their own life, they are going nowhere and in fact are falling behind in terms of living standard and income. Thus to make the provided chart more interesting, the effects of population change should be factored out of the comparison. The vertical axis should be “per-capita” GDP instead of total GDP.

  21. Mitch on May 3, 2014 at 7:00 ami

    No one has mentioned the trade deficit yet – go have a peek at that graph!

  22. Roland on May 4, 2014 at 2:50 ami

    It always amazes me that everyone seems to “know” what the main cause element is for the current weak GDP growth rates. Everyone has an immediate “right” answer to questions that will take a decade to two to review in hindsight and to analyze the turning points and causal relationships. Could it be that demographics hold the main bulk?, only time will tell when the next generation begins their peak spending (i.e. becomes 30-40yr olds).

    The only contribution that i can give is this: I want to analyze not so much how the current credit crisis aftermath GDP growth compares to other post WW2 recessions/GDP growth, but to compare the Great Depression era from peak (1927) to pre WW2 peak (1941). Now that is an interesting analysis as I would expect that the 1927-1941 GDP growth should be significantly less (on cumulative basis) than ours during same time period 2007-2021. If it isn’t the case, then this raises a question- does it matter that the Fed “saved” the banks and economy if we all ended up at the same pace of recovery. Is it true then that no matter what we do, pain through develeraging is either taken all at once (Depression) or spread out over longer periods (Great Recession).