The conventional wisdomis that recessions aren’t

as bad as they used to be.But is the conventional

wisdom flawed?

Time

Rea

l GD

P

“The bottom line is . . . That [m]ajor macroeonomic indicators have not become dramatically more stable between the pre-World War I and Post World War I eras, and recessions have become only slightly less severe on average. Recessions have, however, become less frequent and more uniform over time.”1

1 Christina Romer.“Changes in Business Cycles: Evidence and Explanations,” Journal of Economic Perspectives, 13(2), Spring 1999, p. 23.

Romer claims that the GDP series most frequently used for comparisons of pre-World War I with post-World War II cycles are excessively volatile because they were derived from data on the output of commodities (pig iron, coal, oil, wheat) . Most assumed that there was a one-to-one correspondence between output changes in these highly volatile industries and real GDP. Romer corrects for this defect and produces alternative estimates of real output.

1886-1916 1920-1940 1948-1997

Peak Trough Peak Trough Peak Trough

1887:2 1887:7 1920:1 1921:3 1948:11 1949:101893:1 1894:2 1923:5 1924:7 1953:7 1954:5

1896:1 1897:1 1927:3 1927:12 1957:8 1958:4

1900:4 1900:12 1929:9 1932:7 1960:4 1961:2

1903:7 1904:3 1937:8 1938:6 1969:12 1970:11

1907:7 1908:6 1939:12 1940:3 1973:11 1975:3

1910:1 1911:5 1980:1 1980:7

1914:6 1914:12 1981:7 1982:11

1916:5 1917:1 1990:7 1991:3

Dates of Peaks and Troughs 1

Source: Romer (1999)

1Post World War II dates are identical to NBER dates. Pre-WWII dates are computed using the methodology described by Romer(1999, p. 29).

Business Cycle Reference Dates in the U.S., 1919-1991

Trough Peak TroughExpansionin Months

Contractionin Months

Mar 1919 Jan 1920 July 1921 10 18

July 1921 May 1923 July 1924 22 14

July 1924 Oct 1926 Nov 1927 27 13

Nov 1927 Aug 1929 Mar 1933 21 43

Mar 1933 May 1937 June 1938 50 13

June 1938 Feb 1945 Oct 1945 80 8

Oct 1945 Nov 1948 Oct 1949 37 11

Oct 1949 July 1953 May 1954 45 10

May 1954 Aug 1957 Apr 1958 39 8

Apr 1958 Apr 1960 Feb 1961 24 10

Feb 1961 Dec 1969 Nov 1970 106 11

Nov 1970 Nov 1973 Mar 1975 36 16

Mar 1975 Jan 1980 July 1980 58 6

July 1980 July 1981 Dec 1982 12 17

Dec 1982 July 1990 April 1991 88 9

Apr 1991 ? ? ?1 ?

Source: Bureau of Economic Analysis

1101 months through August, 1999

Index of Industrial Production

Year/Month0

100

Apr 1960

Feb 1961

May 1961

P T

Green shaded area is cumulative loss, given by the sum of the percentage shortfall for each month from April 1960 to may 1961

1886-1916 1920-1940 1948-1997

Year ofPeak

OutputLoss

Year ofPeak

OutputLoss

Year ofPeak

OutputLoss

1887 57.8 1920 662.7 1948 117.41893 260.1 1923 188.2 1953 122.5

1896 135.6 1927 67.9 1957 140.1

1900 80.1 1929 3120.0 1960 93.0

1903 115.5 1937 579.8 1969 98.0

1907 304.3 1939 64.7 1973 248.1

1910 153.3 1980 73.1

1914 74.6 1981 187.4

1916 46.3 1990 76.4

Ave. 136.4 Ave. 780.5 Ave. 128.4

Output Loss1

Source: Romer (1999)

1Output loss is the sum of the percentage shortfall of industrial production in each month between the peak and he return to the peak. It is measured in percentage points.

Cycles differ in theirduration and severity (though

duration is obviously oneaspect of the severity of a contraction). In examining

cycles in comparative perspective,are there any discerniblesimilarities or patterns?

“Though there is absolutely no theoretical reason to anticipate it, one is led by the facts to conclude that, with respect to the qualitative behavior of co-movements among series, business cycles are all alike.” (Lucas 1981, p. 218).

Robert E. Lucas. “Understanding Business Cycles,” reprinted in Studies in Business-Cycle Theory by Robert E. Lucas. Cambridge, MA: MIT Press, 1981, 215-239.

“The regularities observed are in the co-movements among different [aggregate] time series, e.g.Output movements across broadly defined sectors move together (they exhibit high conformity).Production of producer and consumer durables exhibits much greater amplitude than production of nondurables.Production and prices of agricultural goods and natural resources have lower than average conformity.Business profits show high conformity and much greater amplitude than other series.Prices are generally procyclical.Short-term interest rates are procylical; long-term rates slightly so.Monetary aggregates are procyclical.” (Lucas, 1981, p. 217).

Now we want to examine the behavior of keyaggregate-level time

series in the 1979-83 periodin the U.S. Note that this period

spans two full contractions(recessions) and one full

expansion.

Real GDP in the U.S., 1979-83

annual rate

Source: Bureau of Economic Analysis

Year/Quarter

83.4

83.3

83.2

83.1

82.4

82.3

82.2

82.1

81.4

81.3

81.2

81.1

80.4

80.3

80.2

80.1

79.4

79.3

79.2

79.1

billions

of

1992 d

ollars

5100

5050

5000

4950

4900

4850

4800

4750

4700

46504600

Jan.80 is a peak; Jul. 80 is a trough; Jul. 81 is a peak; Dec. 1982 is a trough.

Quarterly Change in GDP, 1979-83

annual rate

Source: Bureau of Economic Analysis

Year/Quarter

83/383/182/382/181/381/180/380/179/3

billions

of

1992 d

ollars

200

150

100

50

0

-50

-100

-150

-200

Consumer Durable Spending, 1979-93

annual rate

Source: Bureau of Economic Analysis

Year/Quarter

83/483/282/482/281/481/280/480/279/4

billions

of

1992 d

ollars

360

350

340

330

320

310

300

290

280

270

260

Gross Private Domestic Investment, 1979-83

annual rate

Source:Bureau of Economic Analysis

Year/Quarter

83/383/182/382/181/381/180/380/179/3

billions o

f 1992 d

ollars

800

750

700

650

600

550

500

Consumer Nondurable Spending, 1979-83

annual rate

Source: Bureau of Economic Analysis

Year/Quarter

83/383/182/382/181/381/180/380/179/3

billions

of

1992 d

ollars

1140

1120

1100

1080

1060

1040

Consumer Spending for Services, 1979-83

annual rate

Source: Bureau of Economic Analysis

Year/Quarter

83/383/182/382/181/381/180/380/179/3

billions

of

1992 d

ollars

1900

1850

1800

1750

1700

1650

1600

Imports and exports of the U.S., 1979-83

annual rate

Year/Quarter

83.383.182.382.181.381.180.380.179.3

billions o

f 1992 d

ollars

360

350

340

330

320

310

300

290

Exports

Imports

Quarterly Rate of Change of (Nominal) GDP and the Money Stock

1979-83

Source: Bureau of Economic Analysis and the Federal Reserve of New York

Year/Quarter

83/483/282/482/281/481/280/480/279/1

perc

ent

10

8

6

4

2

0

-2

-4

-6-8

GNP

M1

Yields of U.S. Treasury Issues, 1979-83

Source: Federal Reserve of New York

Month/Year

Oct 83Feb 83Jun 82Oct 81Feb 81Jun 80Oct 79

Perc

ent

per

year

18

16

14

12

10

8

6

6 Mo.Treasury Bill

10-Yr Treasury Bond

Now we want to examine the behavior of keyaggregate-level time

series in the 1990-91 recession.

GDP in the U.S., 1989-93

annual rate

Source: Bureau of Economic Analysis

Year/Quarter

93.1

92.4

92.3

92.2

92.1

91.4

91.3

91.2

91.1

90.4

90.3

90.2

90.1

89.4

89.3

bilii

ons

of 1

992

dolla

rs6400

6350

6300

6250

6200

6150

6100

6050

6000

July 90 is a peak; April 91 is a trough;

Consumption Expenditure in the U.S., 1989-93

annual rate

Year/Quarter

93.1

92.4

92.3

92.2

92.1

91.4

91.3

91.2

91.1

90.4

90.3

90.2

90.1

89.4

89.3

billions

of

1992 d

ollars

4300

4275

4250

4225

4200

4175

4150

4125

4100

4075

4050

40254000

Investment, Exports, and Imports of the U.S., 1989-93

annual rate

Source: Bureau of Economic Analysis

Year/Quarter

93.1

92.4

92.3

92.2

92.1

91.4

91.3

91.2

91.1

90.4

90.3

90.2

90.1

89.4

89.3

billions

of

1992 d

ollars

900

850

800

750

700

650

600

550

500

Investment

EXPORTS

IMPORTS