A New Look at Real GDP

At Art's Place, Marcus Nunes presents his argument that 1982, despite being the all time high in unemployment, was a great time to enter the work force, "just as the Volcker adjustment took effect, ‘eradicating’ inflation from the system and stabilizing the economy, paving the way to the Great Moderation."  He presents some charts with trend lines that I think are conceptually incorrect.  Putting a single straight trend line through a data set that clearly has an inflection point near 1982 obliterates the change resulting from that inflection.  The right method, in my opinion, is to connect peak to peak and trough to trough, as I did here in My Graph 1.1, for a more extreme example.

But for this post, I want to focus on RGDP, the basis for part of Marcus' Argument.  His claim is that, taking 1982 as an inflection point, volatility was high in the early period and low in the later period, while both periods exhibit the same mean.  There is certainly a volatility difference, with standard deviations of 2.789 and 2.000 for the early and late periods, respectively.

But, the mean is only the same [3.42 vs 3.39] if you truncate the late period at the end of 2007, and eliminate the Great Recession.  One could argue for this, I suppose, if there is an assumption that the Great Recession were an aberration and not the end game of the Great Stagnation.  But I don't believe that is true.  In fact, RGDP growth was already faltering by Q2 of 2004, and had dipped to 1.4% by the beginning of 2007.  Plus, this all follows a rather anemic recovery from the 2001 recession.

Graph 1 shows YoY RGDP growth from 1955 thought Q2 of 2013.  The grand average of 3.37, is shown in pink.  The '55 to '82 average of 3.42 is in yellow, the late period average of 2.94 is shown in bright blue.

Graph 1 - RGDP - YoY % Change

Aside from the post recession spike of 8.6% in Q1, '84, and the bump from Q4, '95 through Q2, '01, the entire post-82  period up until the Great Recession looks rather bland. 

One way to tame jumpy data is to take a moving average.  Graph 2 zeros in on 13 [purple] and 21 year [blue] moving averages from 1967 on.

 Graph 2 - RGDP - YoY % Change with Avgs

The averages reach their all time highs in Q2, '74 and Q1, '79, respectively.  I've placed a trend channel in brown around around the 13 yr average line.  The orange mid-channel line turns out to be the lower boundary for the 21 year average line.  There's basically sideways motion from the late 80's through the early naughts in both lines, then drop-offs starting in 2003 for the 21 yr averages and 2007 for the 13 yr average.  These declines begin before the onset of the Great Recession.

There's always more than one way to look at data. Two years ago, I charted the the YoY % change in the 5 year average of quarterly RGDP data.  That is shown in graph 3.

 Graph 3 - YoY % Change in % Yr Avg of RGDP Growth

The line is color coded by presidential administration.  Make of that what you will.  I didn't put a trend channel on this graph, but you can eye-ball one easily enough, with a clearly downward slope.  Also included in yellow is a 13 year average of the red-blue line.  Clearly, there are two regimes, with an inflection near 81-82, and lower growth after.

The point of all this is to demonstrate that there is more of a difference between the pre- and post 1982 periods than simply a volatility reduction.  There is also a decline in RGDP growth, if you dig into the numbers to find it.  The Great Moderation really was the Great Stagnation.  And it culminated in the Great Recession.