Double Dip or Not? The Data and Policy Implications

We know that in the aftermath of combined housing busts, financial crises, and recessions, recoveries are typically modest if not halting, even if the recession is deep. [0] This characterization appears to have held true, with the question now whether we will enter into a new recession, or merely plug along with growth that technically constitutes a recovery, but is not sufficient to close the output gap with appreciable speed.

Business Cycle Indicators

The NBER lists the indicators that are of interest in terms of business cycle dating, as of the latest trough. (The months pertain to the trough dates that mark the last expansion.)

  • Macroeconomic Advisers’ monthly GDP (June)
  • The Stock-Watson index of monthly GDP (June)
  • Their index of monthly GDI (July)
  • An average of their two indexes of monthly GDP and GDI (June)
  • Real manufacturing and trade sales (June)
  • Index of Industrial Production (June)
  • Real personal income less transfers (October)
  • Aggregate hours of work in the total economy (October)
  • Payroll survey employment (December)
  • Household survey employment (December)

In the following two figures, I depict the series in bullet points 5-10.

Figure 1: Log nonfarm payroll employment (blue), real personal income excluding transfers (red), real manufacturing and trade sales (green), and industrial production (purple), all rescaled to 0 at 2009M06. NBER defined recession dates shaded gray. Source: BLS, BEA, and Federal Reserve Board via St. Louis Fed FRED, NBER, and author’s calculations.

Figure 2: Log nonfarm payroll employment (blue), civilian employment (red), aggregate weekly hours in private sector for production and nonsupervisory workers (green), all rescaled to 0 at 2009M06. NBER defined recession dates shaded gray. Source: BLS via St. Louis Fed FRED, NBER, and author’s calculations.

The flattening out of nonfarm payroll (NFP) employment received most attention, but civilian employment as measured by the household survey has also essentially trended sideways since April. The most troubling aspect of Figure 2 is the decline in aggregate weekly hours in August.

Since I do not have access to the Stock and Watson monthly GDP and GDI series (bullet points 2 and 3), I plot the Macroeconomic Advisers series (bullet point 1) and the e-forecasting monthly GDP series.

Figure 3: Log GDP from e-forecasting (blue), from Macroeconomic Advisers (red), all rescaled to 0 at 2009M06 (MA series rescaled to e-forecasting value at 2009M06). NBER defined recession dates shaded gray. Source: e-forecasting, Macroeconomic Advisers, NBER, and author’s calculations.

The MA series highlights the concerns of a slowdown. The e-forecasting series is less alarming. However, like almost all macroeconomic series, perhaps even more so, these are estimates, subject to later revision. That is why the NBER business cycle dating committee (BCDC) waits so long after a likely trough date to make its decisions.

As Jim mentioned the other day, Gross Domestic Income (GDI) can sometimes be more reliable than the expenditure based approach used in calculating the GDP series. This perspective has a long-standing history. See for instance CEA (2000) (p. 79).

Figure 4: Log real GDP (blue), and log Gross Domestic Income deflated by GDP deflator (red), all rescaled to 0 at 2009Q2. NBER defined recession dates shaded gray. Source: BEA, 2011Q2 2nd release, NBER and author’s calculations.

The rebound from 2009Q2 is slightly more marked using real GDI – by slightly more than a percentage point. However, both series are probably measured with substantial error, so the NBER BCDC considers the average of the two series. In that case, the picture is not appreciably improved.

The Labor Market, Reconsidered

Other labor market indicators exhibit a similar mixed nature.

Figure 5: Log nonfarm payroll employment (blue), civilian employment adjusted to NFP concept (red), and civilian employment (green), all in 000’s, seasonally adjusted. NBER defined recession dates shaded gray. Source: BLS via St. Louis Fed FRED, BLS and NBER.

The household survey based series – either the official civilian employment, or the research series adjusted to conform to the nonfarm payroll concept — rose in August. Nonetheless, the level is roughly the same as it was earlier in the year. One interesting fact is the adjusted series is 1.3 million higher than the official NFP series. (Of course, the household series exhibits a lot more variability than the establishment, so I think one should still put greater weight on the latter generally — although the benchmark revision will likely have a big level impact.)

That point regarding revisions gives rise to my tempered assessment: retrospective indicators do not indicate a new recession, but we know that most of the series that I have cited above will be revised. In other words, I’m not going state unequivocally I am not in a recession (i.e., we are not going to “pull a Lazear”).

Policy Implications

Even if the economy continues to grow, the pace of GDP expansion is still far below that necessary to shrink the output gap quickly.

Figure 6: Log GDP (blue), potential GDP (gray) and forecasted GDP according to mean of August WSJ survey (red), all in Ch.2005$, SAAR. Cumulative losses 2008Q1 up to 2011Q2, and implied losses 2011Q3 up to 2012Q4. Source: BEA, CBO, WSJ, author’s calculations.

As of 2011Q2, the cumulative output loss associated with the $2.8 trillion (in Ch.2005$). Using the August 2011 WSJ survey mean forecast, by 2012Q4, an incremental $1.4 trillion cumulative loss is incurred.

Given the deterioration in the economic outlook, I think it absolutely imperative that additional measures be implemented to sustain economic growth. Jim provided some monetary/fiscal options here.

My own suggestions, ignoring the political constraints imposed by those Republicans who have suddenly changed their views regarding optimal policies [1], include an employment tax credit [2], extension of the payroll tax reduction [3], resumption of transfers to the states (recall, if government employment had not declined, NFP employment would have increased in August), and of course substantial infrastructure investment (I argued for this back in the ARRA debates, but there were many Republican critics who argued that such spending would be ill timed, occurring long after the recession [4] … I expect those same critics to argue against infrastructure spending again, with yet different rationalizations [5]). Some other ideas [6].

Source: CBO (2010).

Notwithstanding assertions to the contrary, there is evidence that these policies can have an impact; and if scaled sufficiently large, can help close the yawning output gap. Certainly, they must be more efficacious than faith based arguments that yet another marginal tax rate reduction that would unleash entrepreneurial energies, or increase investment by increasing after-tax corporate profits when corporate profits are at already all time highs.

Figure 7: After tax corporate profits to GDP ratio (blue), including inventory valuation adjustment and capital consumption allowances (red), both SAAR. NBER defined recession dates shaded gray. Source: BEA, 2011Q2 2nd release, NBER, and author’s calculations.
This post originally appeared at Econbrowser and is reproduced here with permission.