Your preference has been saved. Remove your saved preference.
You must supply both a username and a password to login.
You must supply a username, password and token to login.
Sign on
Passport secured login icon  
Wealth Management
Asset Management
Asset Servicing
Insights & Research
About Northern Trust
Search go
Click to close drop down menu.
Click to close drop down menu.
Financial Intermediary
Learn about asset management solutions designed for Retirement Plan Advisors, TAMPs/Outsourcing Providers, Subadvisory Program Sponsors, RIAs/Financial Advisors and Trust Institutions.
Learn about asset management solutions including: global index management, active equity and fixed income, target retirement date funds, and manager of manager programs.
Get answers to your investment challenges with asset management capabilities including alternatives, exchange traded funds, fixed income, mutual funds and tax-advantaged equity.
Click to close drop down menu.
Northern Trust Logo

Weekly Economic Commentary


Real GDP in the Current Recovery – How Does it Compare?

July 22, 2011

orange_carrat_arrow Download PDF Version

The current economic recovery is eight quarters old.  The first estimate of real GDP growth for the second quarter will be published on July 29.  Chart 1 is an index chart where real GDP data are set equal to 100 at the trough of each recession and real GDP for subsequent quarters are computed accordingly to enable comparisons of real GDP growth across recoveries.  For example, a reading of 104 would mean that real GDP increased 4.0% from the trough.  In 2011:Q1, the seventh quarter of economic recovery, real GDP rose 4.95% from the trough of the current recovery.  At a similar stage of economic recovery after the 2001 recession, real GDP recorded a 4.88% gain.  The performance of the economy after the 1973-75 and 1981-82 recessions was superior by far (see Chart 1).  The forecast range for real GDP growth in 2011:Q2, as per the Blue Chip survey in early-July, is 2.1%-4.1%.  The chart points out that the pace of economic activity in the current business expansion has outpaced the performance of the economy after the 2001 recession in the early stages but has since slowed.  The second quarter readings of GDP will offer further insights about the relative position of the current recovery after two years of economic growth. 

Chart 1 - 07 22 2011

Outcome of Tax Cuts Following the 2001 Recession - Noteworthy Facts

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) lowered taxes on personal income, dividends and capital gains.  Personal income tax rate for the highest bracket was reduced in steps from 39.6% (tax rate prior to EGTRRA) to 35% (after the JGTRRA legislation).  These changes of income tax rates had sunset provisions and were set to expire in 2010; but they were extended under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUIRJCA).  Tax cuts were enacted in 2001 and 2003 to support economic growth.  One of the main tenets of supply side economics is that tax revenues would advance, not decline, following a reduction of tax rates.  Contrary to these expectations, personal income tax revenues as a percent of GDP following the 2001 recovery came in below the historical mean of 8.1% for each of the years during the recovery/expansion period, with the exception of 2007 (see Chart 2). 

Chart 2 - 07 22 2011
Also, the expected trajectory of economic growth did not materialize.  As Chart 1 indicates, economic growth after the 2001 recession is the weakest in the post-war period (Recoveries prior to 1975 are not shown in the interest of keeping the chart reader friendly).  Advocates of supply side economics/tax cuts also cite that the participation rate of the labor force increases as income taxes are reduced because work is favored in the work-leisure trade off in the new income tax environment.  The participation rate stood at 66.8% in 2001 and fell to 66% by 2007 (see Chart 3), another proposition that failed to occur. 

Chart 3 - 07 22 2011 

Gain in productivity growth is cited as benefit of a reduction of personal income taxes.  Of course, other factors play a role in raising productivity of the economy in addition to a favorable tax environment.  However, on this front also, the economic recovery after the 2001 recession falls short of predictions.  Productivity of the U.S. economy shows a decelerating trend in the recovery/expansion phase after the 2001 recession (see Chart 4).  These metrics suggest that projected benefits of a reduction in personal income tax rates are not visible in economic data. 


Chart 4 - 07 22 2011 









The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.