Real GDP Growth in the nascent stages of a recovery: History vs today

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This post is a guest contribution by Asha Bangalore, vice president and economist of The Northern Trust  Company.

Real GDP of the U.S. economy has recorded three consecutive quarters of gains averaging 3.5%, largely due to the 5.6% jump in fourth quarter of 2009, which was an inventory driven event. Economic growth in the third quarter of 2009 and first quarter of 2010 had a 2-handle. Real final sale has risen at an average pace of only 1.3% in the same time span.

Economic history indicates that the recovery path of the U.S. economy is typically impressive in the early stages of a recovery. The median increase of real GDP in the four quarters of an economic recovery was 6.1% in the post-war period, excluding the expansions following the 1990-91 and 2001 recessions. Where does the current economic recovery rank?

The expansions which commenced in 1991 and 2001 are comparable to those that followed the 1960–1961 and 1981–1982 recessions in terms of the duration of the upswing in economic activity. However, a key difference is that the expansions of 1991 and 2001 began on a slow note, with real GDP growth averaging less than 2.5% in the early part of the recovery compared with robust gains in real GDP in the 1960s and 1980s business cycles. In addition, the 1991 and 2001 expansions have posted the slowest growth rate for the entire course of the upswing in the post-war period.

Chart 1 plots real GDP in an index chart to make comparisons easy. [Real GDP in the trough of each business cycle is set to 100 in an index chart and subsequent quarterly estimates of real GDP data are computed. A reading of 105 implies that real GDP has risen 5.0% from the trough. Although the National Bureau of Economic Research is yet to announce the trough of the cycle, we have assumed that the recession ended in the second quarter of 2009]. An abbreviated period of prior expansions is illustrated to keep the chart readable. As Chart 1 indicates, at the end of three quarters of economic growth, the current recovery is marginally ahead compared with the 1991 and 2001 business expansions but lags behind the 1961 and 1982 recoveries. Real GDP has risen 2.6% from the trough in the current recovery compared with below 2.0% gains in 1991 and 2001 cycles. By contrast, real GDP had moved ahead 5.6% at the end of three quarters from the troughs of 1961 and 1982 recessions.

An important aspect to note is that employment conditions are tied to the pace of real GDP growth. The performance of the labor market is critical for policy making in the near term. Stay tuned, we will be updating this chart in the quarters ahead as more data become available.

Source: Asha Bangalore, Northern Trust Daily Global Commentary, July 9, 2010.

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