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Forecasting Growth over the Next Year with a Business Cycle Index

By Lang and Kevin J. Lansing


The current economic recovery is proceeding at a tepid pace despite massive federal fiscal stimulus and extremely low interest rates. Forecasts derived from business cycle indicators produced by the Chicago and Philadelphia Federal Reserve Banks predict that real U.S. GDP growth through the first half of 2011 will remain at or below potential growth. If these forecasts prove accurate, then the historical relationship between real GDP growth and the labor market suggests that the unemployment rate could rise by as much as 0.5 percentage point during this period. The National Bureau of Economic Research Business Cycle Dating Committee has determined that the recent recession ended in June 2009. Since then, the U.S. economy has recorded four consecutive quarters of positive real GDP growth. During this period, inventory accumulation by businesses accounted for more than half the growth, while real final sales of domestically produced goods and services grew only at an annual 1.1 % rate on average. Due to the severity of the recession and the lackluster nature of the recovery so far, the level of real GDP at the end of the second quarter of 2010 was still 1.3 % below the pre-recession peak reached more than 2 years ago. Recent weaker-than-expected economic data have raised concerns about the recovery’s staying power. I

Year: 2010
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