The Gordon Growth number is the average of trend line growth rates.
At this point I couldn't tell you how I managed to turn the phrase "measured between quarters with identical unemployment rates" into the process I'm using. But the process works, far as I can tell. So here we are.
I want to go back to that first sentence which has occupied my attention for three or four days now. This time, I'm going to start thinking about the second half of the sentence, and productivity:
Measured between quarters with identical unemployment rates, U. S. economic growth slowed by more than half from 3.2 percent per year during 1970-2006 to only 1.4 percent during 2006-16, and only half of this GDP growth slowdown is accounted for diminished productivity growth.Growth slowed from 3.2% to 1.4%, a difference of 1.8%. And only half of this slowdown can be attributed to diminished productivity growth. So I want to look for a slowdown in productivity growth of 0.9% or so. I should find this slowdown by comparing the time periods noted in the quote.
This is related to "growth accounting": The GDP growth rate can be calculated as the growth rate of the labor force plus the growth rate of labor productivity, as Menzie Chinn shows. So I think the productivity that Robert Gordon's talking about is labor productivity. Real output per hour.
Using PRS85006092 I get an average productivity growth rate of 2.1% for 1970-2016, and an average of 1.2% for 2006-2016. The one minus the other is 0.9%, exactly the number we're looking for.
I put a new spreadsheet together, formatted better, with the info for each time period all in one column on the sheet. I tested the sheet by duplicating my own previous results. It was good.
I checked the productivity numbers too. The sheet was good.
Satisfied that the new worksheet is good, I made a copy of the sheet and gave it different time periods to evaluate. For the three time series I'm looking at, my data goes from 1948Q1 to 2018Q1. Seventy years of data. I figured I'd look at ten-year periods:
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| Graph #1: Gordon Growth and Productivity -- 10-Year Periods |
There is a general downward trend in the Gordon Growth number on my graph.
The red dots show productivity by decade. There are high points at 1958-1968 and 1998-2008; these highs more or less agree with other histories of productivity that I have seen. The numbers I have are 2.1% for Robert Gordon's 1970-2006 and 1.2% for his 2006-2016. The latter is a good match to my 2008-2018 here, and the other looks about right as an average of the red dot values from 1968 to 2008. In the ballpark.
The green dots are blue minus red: Gordon Growth less Productivity Growth. To put it in the "growth accounting" framework, green shows growth attributable to things other than labor productivity.
Labor force size, maybe?
Maybe. But I don't like to close doors. If we attribute the green growth to labor force size, there is nothing left over that I can point to and say "it was caused by the growth of private debt". And I have to have something I can point to and talk about debt.
To me, breaking up 70 years into seven 10-year periods is much more informative than breaking it into two periods punctuated by a "great" recession. So I thought maybe I'd gain even more by breaking it into fourteen 5-year periods. But all I gained was messiness:
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| Graph #2: Gordon Growth and Productivity -- 5-Year Periods |
- 1953-1958: (2) recessions
- 1978-1983: (2) recessions
- 1988-1993: (1) recession
- 2008-2013: (1) "great" recession
The red dots still show early and late high points, plus a smaller high in the 1980s.
The green is all up-and-down. It's indecipherable. But probably not closely tied to labor force size.
I want to go back to 10-year periods, to minimize the effects of recession. But this time I'll figure incremental, overlapping ten-year periods: 1948Q1-1958Q1, then 1949Q1-1959Q1, then 1950Q1-1960Q1, and like that. And instead of getting a "dot" for a ten year period, I'll have points on a line, where each point is the end of a ten-year period. I think that'll smooth out the picture, even better than the first graph did.
...
Here's the graph:
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| Graph #3: Gordon Growth and Productivity -- Incremental 10-Year Periods |
See what I did here? I put the Legend off to the right rather than up top with the title. With the Legend off to the right, the years of data are compressed into a smaller space. The agitation would look less severe if the lines could stretch out into the space where the Legend is. But hey, I'm just showing you the graph as I first saw it, with the Legend at right and the lines compressed.
This data deserves to be compressed. Look at that green line: It is up and down and up and down and up and down from start to finish. You don't want to hide that agitation.
The red line provides a pretty good display of productivity, I think, with peaks early and late, and listlessness between.
And the bright blue line, Gordon Growth, when I saw that line it reminded me of this graph from Fernando Martin of the St. Louis Fed:
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| Graph #4: From Why Does Economic Growth Keep Slowing Down? by Fernando Martin |
Well I'm almost out of things to say about Gordon Growth, at least for now. But first, look again at the blue line on Graph #3. That last little tic it shows, from 2017 to 2018, is an uptick.
Ooh ooh Trump. That was my first ball-bustin thought. It isn't, though. Isn't Trump. The graph shows ten-year averages.
The uptick from 2017Q1 to 2018Q1 is an uptick in 2008Q1-2018Q1 relative to 2007Q1-2017Q1. We see an uptick on Graph #3 because the year 2017 was okay and the year 2007 was horrible. It isn't Trump.
Here's FRED:
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| Graph #5: 2007Q1 to a Still-Preliminary 2018Q1, Quarterly (The Same Data I've Been Using) |
The change from 2007Q1 (where the graph starts) is a jump up to over 2.5%, then a slight fall, then a bigger fall, then a sharp drop into negative territory and the start of the Great Recession. All in all, a big downer.
The change from 2017Q1 (the bottom of the last "V", at the right) is a jump up to over 2.5%, then a slight increase, then a slight fall, then another slight fall as the line heads to a tentative 2.3% rate. All in all, fairly flat.
The difference in the last two bright blue points on my #3 is this: The next-to-last point includes RGDP falling into recession. The last point doesn't, so the last point goes up. I'm trying to avoid tiresome detail here. But people are going to be saying Ooh ooh Trump.
During the next couple years, the bright blue line is going to go up and up significantly, as time goes by and the "Great Recession" gradually drops out of the calculation.
So in the next few years, if you hear anybody say "The economy is great again!" and they hold up a graph of 10-year average growth, well, now you have evidence to shoot them down.
I for one still expect the economy to improve for a number of reasons. But I expect to see it in current data, not in ten-year averages.
1 comment:
In the last few paragraphs above, I challenge the use of "ten-year average" growth as a measure of current economic performance. After I wrote those paragraphs, I said to myself: No, that's a straw man. Surely no one would look at the ten-year average, with the Great Recession data falling out of the average (and average growth increasing as a result), surely no one would use that increase as evidence that things are getting better.
That's what I said to myself. But just now I come across John Taylor, 31 December 2017, who says:
"But there is no question that the economic growth rate over the past ten years has been dismal—only 1.4 percent per year on average. A chart of the ten-year moving average of growth rates tells the story."
John Taylor is getting ready to hold up a chart of ten-year-average growth as evidence that things are getting better. He'll be "telling a story", all right!
Don't let him get away with it.
Don't let anyone get away with it.
// see my follow-up post, The 10-year average 10 years out
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