GDP plus should be GDP less

For less bounce!

The Philly Fed has called the measure of GDP obtained from “crushing” the usual measure of GDP (expenditure based) and the income-based measure GDI GDP plus:

In particular, as proposed in Aruoba, Diebold, Nalewaik, Schorfheide, and Song (ADNSS) , one can view both GDP_E and GDP_I as noisy indicators of underlying latent true GDP, which can then be extracted using optimal filtering methods.

Backtracking a bit: GDE and GDI are two sides of the same ledger and so give out the same information. In other words, although over short periods of time they can diverge, the divergence cannot be persistent or systematic. The chart shows that´s true for NGDE (NGDP) and NGDI. The recession of 1981/82 and the great recession of 2008/09 are circled.

What ADNSS do is filter out at least some of the ‘noise’ in both series to come up with a less bouncy measure.

They provide a series for the annualized growth rate of the GDP plus and the charts below compare that measure with annualized growth for both NGDP and NGDI for three selected periods of ‘Greatness”: The Great Inflation (1965-79), the Great Moderation (1987/07) and the Great Recession (2008/13). The Table below gives the summary statistics for the different annualized growth measures. Notice that GDP plus preserves the mean growth but significantly reduces the volatility, ‘bounciness’ or standard deviation of the growth rate, especially when they are high in the original series.

	Mean   Volatility	Mean   Volatility	Mean   Volatility
Great Inflation	3.8%          4.2	3.6%           3.8	3.4%        2.8
Great Moderation	3.1%           2.1	3.1%           2.5	3.0%        1.9
Great Recession	0.9%           3.2	1.0%           3.3	1.2%        2.6

At times like these I´m reminded Benoit Mandelbrot, who ‘cherished’ roughness!