Creating Harmony Out of Noisy Data

By the spring of 2012, the economic performance of the United States was operating at a much different pace from what many analysts had expected. Decision makers in both private and public sectors faced a set of mixed and unclear economic and financial indicators that offered a confused picture of the state of the economic recovery, the pace of that recovery, and the character of the structural challenges facing the economy.

Three major trends characterized the confusion. First, top-line economic growth had been unusually low and uneven relative to past economic recoveries since World War II. During the recovery, the economy accelerated after an initial stimulus but then lost momentum as the stimulus generated no follow-on growth. Decision makers had the difficult challenge of identifying what the true trend in the economy was and what the cycle around that trend was. Had trend economic growth downshifted in the United States?

Second, job growth had become the number one political issue. But the lack of job growth appeared out of line with traditional economic models on a cyclical basis. Further, weak job growth intimated a sharp structural break in both private and public sector decision makers' preconceived understanding of the relationship between employment and population growth. Had there been a structural break between employment and population growth, and/or between employment and output growth? Why have exceptionally low mortgage ...

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