The Recovery Compared

Following up on my post The Recovery According to Ed “We are not in a recession” Lazear
, reader Rick Stryker writes:
Lazear's points are clear: 1) Real growth has been sub-par in this recovery compared to previous recoveries...
This point is clearly falsified by the graphs from the St. Louis Fed:

Figure 1: NBER Business Cycle Dating Committee indicators, in current and previous recoveries; from St. Louis Fed. NOTE: The charts plot four main economic indicators tracked by the NBER dating committee; each series is indexed to 100 at the start of the expansion. The green line indicates the current expansion. The solid blue line indicates the average of the previous ten expansions. The two dashed lines report the highest and lowest values recorded across these previous expansions. For industrial production, employment, and real retail sales, the average series includes the 10 expansions starting with the October 1949 business cycle trough. For real income, the average starts with the February 1961 trough. For additional information, see the Federal Reserve Bank of St. Louis Economic Synopses, 2009, No. 4.

Even using employment, one sees that this is not the worst recovery. Further, inspection of real GDP heightens the disquiet one might have regarding Professor Lazear's assertion that the current recovery is the worst ever (even leaving aside recoveries in other countries).

Figure 2: GDP: The green line indicates the current expansion. The solid blue line indicates the average of the previous expansions. The two dashed lines report the highest and lowest values recorded across these previous expansions. All normalized to zero at trough. Source: St. Louis Fed.

I have stressed the fact that the output gap is the correct metric for assessing what policy should do. [1] [2] [3] Hence, another way to assess progress is to see what the output gap has done since the trough. I do this for the current and previous three expansions. (By the way, this is much better than picking an ad hoc trend to compare against, especially since log GDP appears to a difference stationary process).

Figure 3: Log output gap for 2009Q2 recovery (blue), 2001Q4 recovery (red), 1991Q1 recovery (green), 1982Q4 recovery (purple). Output gaps calculated using real GDP and CBO potential output. Source: BEA 2011Q4 3rd release, and CBO, Budget and Economic Outlook, January 2012.

By this metric, the Bush recovery of 2001Q1-2007Q4 is pretty much tied for worst recovery of the last four.

None of this should detract from the point that, even if the Bush recovery was worse, we should still maintain fiscal and monetary stimulus.