Monday, September 19, 2016

Productivity without "recession effects"


Productivity goes high after a recession -- after every recession:

Graph #1: Productivity (Percent Change from Year Ago)
That's pretty interesting until you notice how reliable it is. I mean, what does it tell us? It tells us "If you want productivity to go up, have a recession." Great. So when we come out of the recession, productivity goes high for a moment, and then drops way low again.

So, what happens if we finally "solve the economic problem" and never have another recession? Low productivity forever??

//

Counting "recession effect" highs produces impressive but questionable productivity numbers. This graph from BLS says 2000-2007 had the best productivity growth since 1973:

Graph #2: Productivity as BLS sees it
But the 2001-2007 business cycle was -- by far -- the weakest of the postwar period. I think the BLS high number for 2000-2007 is a result of counting the recession-effect highs. Sometimes I wonder what productivity would look like if we could cut off those recession-effect highs and get a better feel for productivity in the good years.

But how would you decide which spikes to cut off? I mean, sometimes there is only one spike and sometimes there are two in quick succession. Should we count the two as one spike and cut them both off? What if it's more than two spikes? Should we cut them all off?

Obviously, we need a better plan.

//

If you want to measure productivity in the good years, you have to know what you mean by "good years". Here's a thought: Let's look at productivity in the context of debt service.

This next graph shows productivity as "percent change" (not like Graph #1) together with household debt service. As you know, I find a relation between the two: Low debt service implies low productivity; rising debt service implies rising productivity.

Graph #3: Productivity in the Context of Debt Service
I marked up the graph to show three "bottoms" of the debt service bowl, along with productivity at the bottom:

Graph #4: Productivity at the Bottom of the Debt Service Bowl
Consider one of the three; consider the economy since the crisis. These were not good years. During the recession? Not good. During the remarkable drop in debt service? Not good. How about all the while debt service has been at bottom? Not good. Nobody else puts it in terms of debt service, but this is what everyone has been saying.

My definition of NOT GOOD years is the time of recession, plus the years after it when debt service is falling or running low. The good years, then, begin when debt service is rising from the bottom. And the good years continue to the start of recession.

Having what looks like a workable definition, I downloaded the FRED data for Graph #3 and set to work.

//

Brought the data in to Excel. Went back to FRED for a recession indicator. Added columns for "Bowl Drop" (for times when debt service is falling) and "Bowl Bottom" (for times it is running low). I'll just put a "1" in those columns, on the rows where Debt Service is falling or running low.

I made a new column to total up the Recession, Drop, and Bottom columns. I figure I'll graph the Totals column. That way I can just put "1" in the cells for Bad Years and watch the graph change while I'm working.

Instead of showing "recession bars" on my graph I want to show "bad years" bars. That's what the Totals column is for. My bars will be wider than FRED's recession bars, because I'm including the Drop and Bottom years.

To make this all work I had to dig up the old recession_bars.pdf from the St. Louis Fed. But I needed to use the right axis to make the bar display work. So I had to move Debt Service off the right axis and onto the left with Productivity.

The axis values are different for Debt Service and Productivity. Conveniently though, if I add 11 to the Productivity values, I get the same vertical scale values that Debt Service uses. Couldn't get much simpler than that!

//

The "recession bars" thing worked great (but I need a version of the PDF written for Excel 2010). This one from econ.duke.edu helped.

//

This is the graph I came up with:

Graph #5:Productivity and Debt Service with Good Years on White Background
Basically, the recession bars are wider than before. Each one continues to the right until the red line starts to go up. At the 1990 recession the recession bar also inches leftward for six months (two quarters), as the bowl drop that time started before the NBER recession-start date.

I didn't fiddle with the white area between the 1980 and 1982 recessions. Obviously there is a "recession effect" productivity peak between those two recessions. But the Debt Service data only starts in 1980, and I don't want to guess about any "bowl drop" action. Besides, if I gray out the productivity peak after the 1980 recession, there's almost no white left before the 1982 recession. So I just left that one alone.

My next objective is to get average productivity growth rate values for the areas on white background. I have in mind to compare these values to the numbers on the BLS graph above.

//

So that all worked out okay. I got my "recession, drop, & bottom" data all on gray background, and I figured average productivity rates for the "good years" on white background.

I was ready to compare my numbers to the BLS numbers and I suddenly realized mine are quarterly growth rates and theirs are annual. Their numbers are like four times the size of mine.

And then I realized I didn't know how to figure what FRED calls an "annual rate" for quarterly data. I don't think you just multiply by four. Maybe you do, I don't know. So I scrounged around the web and finally found Annualizing Data at the Dallas Fed.

So now I have my productivity numbers as annualized rates. Turns out that 1994-2001 is the period of highest "good years" productivity, not the 2000-2007 period that BLS shows.

As expected. But look how high the productivity number goes for the "bad" years from 2001 to 2004:

Graph #6: Productivity Growth in Good Years (white background) and Bad Years (gray background)
That is a result of the recession effect. Average the productivity spike numbers into the years before the crisis, and you make the pre-crisis years look like a strong growth period when it was not.

Recession effects are not the same as a healthy economy. Not by a long shot.


// the Excel file

1 comment:

The Arthurian said...

Neil Irwin says:

"If you look at long-term patterns of productivity growth, they roughly fit this idea, that a booming job market tends to be followed by a productivity boom, and that deep recessions are followed by productivity slumps."

I say:

"Productivity goes high after a recession -- after every recession."