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Pedro Amaral |

Senior Research Economist

Pedro Amaral

Pedro Amaral is a senior research economist in the Research Department of the Federal Reserve Bank of Cleveland. His main areas of research are macroeconomics and labor economics, and he is particularly interested in the effects of financial intermediation frictions as well as episodes of the Great Depression in countries where it occurred.

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05.11.10

Economic Trends

The Recovery So Far

Pedro Amaral

According to the Bureau of Economic Analysis’s latest estimate, real GDP increased at a 3.2 percent annualized rate in the first quarter of the year. This increase was fueled by private consumption, which increased 3.6 percent, the largest quarterly growth in this category since the first quarter of 2007. Private investment also increased at a healthy clip (14.8 percent), albeit much lower than the previous quarter, when it increased 46.1 percent mainly because of inventories. This is the third consecutive quarter in which real GDP registered positive growth, an opportune time to start talking about the recovery.

Although the NBER committee that sets the official recession dates has not, as of yet, announced an ending date for the latest downturn, most economists would agree that it was sometime around the end of the second quarter of 2009. That being the case, the recovery period is now just a little over three quarters old. Let’s take that point as a given and assess how this recovery compares, so far, to previous ones.

Centering our attention first on the relative strength of the recovery, we note that real GDP increased at an annualized rate of 3.6 percent over the last three quarters. Looking over all the recessions since World War II, we see that this is faster than the last two recessions, but slower than all the others. Compared to this one, though, the last two recessions were mild. In fact, this was the deepest of all postwar recessions, so another way to compare the strength of the recovery is to measure how far the economy is from its “trend.”

The trend is computed by taking the peak GDP prior to the recession and extrapolating what its path would have been if growth had been the same as the average growth throughout the post-WWII period (roughly 0.8 percent per quarter). To compare deviations from the trend across recessions, we index recessions by their peaks, as in the chart below. By this yardstick, the recovery up to this point seems feeble at most, but not the worst on record; that would be the 2001 recession.

As for the composition of output, two things have struck economists’ attention regarding the current recovery. The first one is the behavior of inventories, which gave rise to the spectacular increase in private investment last quarter, and which Ken Beauchemin discussed in a Trends article last month; the second and most recent surprise was the strength of consumer expenditures in the first quarter of 2010, as described in the opening paragraph. This puzzled economists because employment numbers remain weak, at best, and disposable personal income did not grow at all in real terms during that quarter.

The table below tries to put this in perspective by looking at the three recovery quarters so far (not just at the first quarter of 2010) and comparing it to past recoveries. The first row presents the annualized output growth rates, while the subsequent rows present the contribution of each component. What is striking is just how weak consumption’s contribution has been compared to other recoveries. This should help dispel the notion that consumption increases are driving the recovery, but it still leaves this recent spurt unexplained.

Contributions to Output Growth

 
2009:Q3–2010:Q1
2001:Q4–2002:Q2 1983:Q1–1983:Q3 1975:Q2–1975:Q4
Output
3.66
2.33
7.49
5.09
Consumption
1.89
2.23
4.13
3.53
Investment
2.19
−0.31
4.11
1.34
Net exports
−0.38
−0.65
−1.73
−0.38
Government expenditures
−0.03
1.03
0.95
0.57

Sources: Bureau of Economic Analysis; author's calculations.

Inquiring a little bit deeper into personal consumption expenditures shows that the driver for the recent increase was durable goods purchases, which increased 11.3 percent. In contrast, nondurables and services increased only 3.9 percent and 2 percent, respectively. This is not surprising, as durables are households’ physical investments (things like cars, TVs, and computer equipment), and as such are much more volatile than the other consumption components and thus tend to increase a lot faster than output (or overall consumption for that matter) during recoveries.

Why did durables consumption increase so much in the first quarter of 2010 when real personal disposable income was unchanged? The answer here is threefold. First, after having peaked at 5.4 percent in the second quarter of 2009, savings as a percentage of disposable income are down to 3.1 percent. Second, but not unrelated, interest rates are as low as they have ever been. The proliferation of financing deals on big-ticket items (zero percent financing anyone?) means households have very little immediate out-of-pocket expenses. Finally, the relative price of durables has been falling for three quarters, making buying that big-screen TV look like an increasingly better deal than splurging at the movie theater.