Thursday, October 18, 2012

Cleveland Fed Computes Current Real GDP Trend Growth Rate At 1.7 To 2.2 Percent

From The Federal Reserve Bank Of Cleveland, Economic Trends, "Estimating Real GDP Growth Trends" by Margaret Jacobson and Filippo Occhino:
We begin with a simple measure of trend growth that is based on real GDP data only. To construct it, we eliminate all short-term and medium-term fluctuations, including business cycles, and we keep the long-term changes only. According to this measure, trend growth reached a peak rate above 4 percent at the beginning of the 1960s, declined to rates well below 3 percent in the late 1970s, and partially recovered in the 1980s, only to drop further in the late 1990s and 2000s toward the current 2 percent rate. Other measures based on real GDP data lead to slightly different estimates, but they all agree that trend growth is currently close to historically low rates.

Besides real GDP data, other information is useful for estimating trend growth. Real GDP trend growth can be decomposed into the sum of the trend growths of three components: output per employee (employee productivity henceforth), the labor force, and the ratio of employment to the labor force. The latter component, which is related to changes in the trend of the unemployment rate, contributes little to real GDP trend growth, so we focus on the other two components, first on employee productivity and then on the labor force.
Summing up our estimates for the trend growth rates of employee productivity and the labor force, we obtain the implied growth rate of the real GDP trend. The current rate likely lies in the interval between 1.7 percent and 2.2 percent.... [Charts omitted.]

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