Lacklustre recovery down to pre-crisis factors – research

Stripping cyclical effects from output data reveals that the recent lacklustre performance of growth in the US began before the 2008 crisis, implying the financial disruption is not to blame for the flattening of trend growth, researchers have found.

San Francisco Fed economist John Fernald and academic economists Robert Hall, James Stock and Mark Watson estimate cyclical effects using Okun’s law – the relationship between changes in output and changes in unemployment. Other research has shown the law held up “reasonably well” post-2007, they say.

Once cyclical factors are eliminated, it becomes clear the growth diverged from its long-run trend in the mid-2000s, before the crisis struck. “In other words, the slowing trend was not in itself the result of the recession, associated financial disruptions, or policy changes since 2009,” the authors write in the ‘economic letter’.

Their analysis indicates the most important factor behind the shortfall in productivity during the recovery has been limited innovation, measured by growth in total factor productivity, which began to slow before the crisis. Falling labour force participation also contributed to flattening of the trend – a change that began even earlier, in the late 1990s.