Economic and Business Forecasting: Analyzing and Interpreting Econometric Results

CHAPTER 14

Putting the Analysis to Work in the Twenty-First-Century Economy

During the current business recovery, the economic performance of the United States has been very different from what many analysts had expected. Decision makers in both private and public sectors faced a set of mixed 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.

At the start of America's journey to recovery, three major trends characterized the confusion. First, gross domestic product (GDP) growth had been unusually low and uneven relative to economic recoveries since World War II. During the recovery, the economy accelerated after an initial stimulus from the Federal Reserve (the Fed) and the federal government but then lost momentum as the stimulus generated no follow-on acceleration in growth. Decision makers had the difficult challenge of identifying what was the true trend in the economy and what was the cycle around that trend. Had trend economic growth fundamentally downshifted in the United States?

Second, job growth had become the number one political issue for both parties. But job growth appeared soft and out of line with GDP growth as the business cycle progressed. 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 ...