Revisionist Economic History? Potential GDP in the United States

Abstract

U.S. Gross Domestic Product (GDP) has finally caught up with the Congressional Budget Office (CBO) estimates of potential GDP as of late 2017, even though the National Bureau of Economic Research dates the end of the Great Recession in 2009. This has been a widely recognized long slow recovery back to ‘full employment.’ What is less widely recognized is that this catch-up of actual GDP with potential GDP has occurred as much from CBO downward revisions of its estimates of potential GDP as from growth in actual GDP. Real time projections of potential and actual GDP given by the Congressional Budget Office to policymakers widely underestimated the severity of the recession and overestimated the U.S. economy’s ability to recover. These errors have real-time implications: policymakers used these estimates to assess the level of stimulus needed to boost the economy. This report examines CBO estimates of potential GDP, including estimates of historical values and forecasts of future values, and documents how the CBO continued to revise downward its potential GDP estimates for years after the end of the Great Recession. These CBO revisions were changes in both forecasts of future potential GDP values and estimates of past values of potential GDP. The authors also examine the behavior of factors contributing to the CBO revisions, including changes in the labor force participation rate.