Productivity and potential output before, during, and after the Great Recession

This paper makes four points about the recent dynamics of productivity and potential output. First, after accelerating in the mid-1990s, labor and total-factor productivity growth slowed after the early to mid 2000s. This slowdown preceded the Great Recession. Second, in contrast to some informal commentary, productivity performance during the Great Recession and early in the subsequent recovery was roughly in line with previous experience during deep recessions. In particular, the evidence suggests substantial labor and capital hoarding. During the recovery, measures of factor utilization fairly quickly rebounded, and TFP and labor productivity returned to their anemic mid-2000s trends. Third, a plausible benchmark for the slower pace of underlying technology along with demographic assumptions from the Congressional Budget Office imply steady-state GDP growth of just over 2 percent per year—lower than most estimates. Finally, during the recession and recovery, potential output grew even more slowly— reflecting especially the effect of weak investment on growth in capital input. Half or more of the shortfall of actual output relative to pre-recession estimates of the potential trend reflects a reduction in potential.