Gdp Growth Usa

Over the last decade and a half, the United States

has experienced an unprecedented period of stable

economic growth. Indeed, in the period since 1984, the

volatility of quarterly real GDP growth has been only

half that of the preceding twenty-five years. This

pronounced decline in aggregate volatility invites us

to take a closer look at the volatility trends within

important components of real GDP--specifically, consumer

spending, residential and business investment,

government purchases, and international trade. To what

extent has each of these sectors shared in the increased

stability of the overall economy?

In this edition of Current Issues, we address this

question by comparing the volatility of growth exhibited

by each component before and after 1984. We also

seek to identify those components that contributed the

most to the overall drop in growth variability.1

Our analysis reveals that the growth rates of all the

major components of GDP have followed a steadier

course, with the most marked reductions in volatility

occurring in residential investment and trade. When we

weigh each component by its share in overall economic

growth, however, inventory investment and consumer

spending emerge as the chief contributors to the increased

stability of the economy since 1984. Because inventory

investment's share of GDP is very small, the important

role played by this component is particularly striking.

We also examine the composition of the more stable

economy across the stages of the business cycle. We

find that the growth of GDP and its components has

been smoother in both recessions and expansions. Thus,

the drop in volatility cannot be attributed solely to a

simple decline in the number and severity of recessions

in recent years.

Two Types of Explanations

Increased stability in the growth of aggregate GDP and

its individual components may reflect two broad types

of changes in the economic environment since the early

1980s. First, structural changes--such as technological

innovations and regulatory shifts--may have helped

smooth economic fluctuations in some sectors. Indeed,

in the early 1980s, many structural changes were under

way that may have improved certain sectors' ability to

respond to changes in demand and to absorb economic

shocks. These improvements, in turn, could have led to

more stable growth.

The second type of explanation--while potentially

important--goes far beyond the scope of the simple

decomposition analysis presented here. This explanation

relates to the role of monetary policy and economic

shocks in the variability of economic growth. It is possible

that a stabilizing monetary policy and smaller economic

shocks--"good policy and good luck"--may have played

a role in the decline of overall volatility.2 While this

second explanation clearly deserves further research, we

focus our analysis solely on possible structural explanations

for the more stable growth.

The Decline in the Volatility of GDP Growth

A glance at the path of real GDP growth in recent

decades suggests that volatility dropped markedly not

long after the 1981-82 recession (Chart 1). Employing

advanced statistical techniques, McConnell and Perez

Quiros (1998) identify the date of the volatility drop

in GDP growth as the first quarter of 1984. In our

analysis, we use this date to split our sample into two

periods: 1959-83 and 1984-98. When we calculate the

volatility of GDP growth--measured by the standard

deviation of quarterly growth rates--for each of the two

periods, we find a significant 2.2 percentage point drop

from the first period to the second.3

Similar calculations for the growth rates of the major

components of GDP show that all have become less

volatile in the later period (Table 1). Residential investment,

exports, and imports experienced the largest

absolute declines in growth volatility, while federal

government purchases and consumer spending experienced

the smallest reductions in volatility. The fact that

growth patterns in each of the major components of

GDP reflected the decline in aggregate

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