September 22, 1999


The latest edition of the New York Fed's Current Issues in Economics and Finance, entitled A Decomposition of the Increased Stability of GDP Growth, is attached for your review.

The volatility of quarterly real GDP growth since 1984 has been only half that of the preceding twenty-five years, report authors Margaret McConnell, Patricia Mosser, and Gabriel Perez Quiros. To gain a better understanding of this decline, the authors examine the volatility trends within the major components of GDP--consumer spending, residential and business investment, government purchases, and international trade. They find that:

  • Since 1984, the growth rate of each component has followed a steadier course, with the greatest outright reductions in volatility occurring in the growth rates of residential investment and trade.

  • When the authors account for each component’s share of overall GDP, however, inventory investment and consumer spending emerge as the chief contributors to the greater stability of economic growth. Because inventory investment makes up a small portion of overall GDP, the important role played by this component is particularly striking.

  • The growth of GDP and its components has been smoother in both recessions and expansions since 1984. Thus, the drop in volatility cannot be attributed solely to a simple decline in the number and severity of recessions in recent years.

The authors discuss regulatory and structural changes affecting some components that may have helped promote stability. To the extent that structural changes are in fact a cause, the decrease in volatility may become a permanent feature of the U.S. economy, the authors conclude.

Margaret McConnell and Patricia Mosser are economists at the New York Fed. Gabriel Perez Quiros is a former New York Fed economist, now working at the European Central Bank.

Contact: Douglas Tillett

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