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Thursday September 21st 2017

Two Centuries of Business Cycles and Real GDP

Santa Fe Southern Railway locomotive and coach. Dec-2013.
Photo by Standard Travel Fotos

One of the great things about living during the age of the internet is that there’s a ton of free data available. One good website, MeasuringWorth.com, provides data on economic indicators for a variety of countries. We took a look at U.S. GDP on MeasuringWorth, which has data going back to 1790.

Gross Domestic Product (GDP) is the value of all final goods and services produced within a country during some period. Nominal GDP is the value in current year prices. Real GDP gives the value using prices in some base year using the GDP Deflator price index. In simple Engish, Real GDP is adjusted for inflation.

MeasuringWorth and Quandl
We found 64 MeasuringWorth datasets on Quandl which can be downloaded into R using the Quandl R package. We took a look at the U.S. Real GDP time series. When you register at Quandl, you get an authentication token which allows for unlimited access to the data sets on Quandl.

Two Centuries of Growth & Business Cycles
The United States has experienced tremendous growth since 1800. We examined U.S. Real GDP for the 19th century and 20th century. We put each century on separate graphs so we could focus on each century.

The graphs also show the business cycle expansions and contractions. Business cycle data is from NBER (National Bureau of Economic Research) Business Cycle Dating Committee. NBER determines the reference dates of the business cycles using various measures of economic activity and provides data going back to December 1854, the data of the first trough.

Business cycles start at a trough (low point) which marks the beginning of a period of expansion. The peak (high point) is the end of the expansion and start of a period of contraction. Contraction ends at the next trough and the cycle continues. On the graphs, contractions are shaded purple and expansion are the spaces between contractions. There have been 33 expansion-contraction cycles since since 1854. The last expansion began in June 2009.

Real GDP by Century

The first graph shows a log plot of Real GDP for the 19th century, 1800-1900. All the plots are log plots because exponential growth is a straight line, and the slope is the rate of growth. Year is on the x-axis. The value of Real GDP on the y-axis is in millions of 2005 dollars.

U.S. Real GDP. 1800 to 1900.
Click for larger
Note: No business cycles are shown for the first half of the 19th century because the NBER dating begins in 1854.

In 1800, RGDP was $7,994 millions. By 1900, RGDP multiplied by 57x to $456,861 millions, which is an annualized growth rate of 4.1% p.a. On the chart, the red line is an OLS (Ordinary Least Squares) trend  line. The rate from the OLS trend line is 4.2% p.a.

The next graph shows a log plot of Real GDP for the 20th century, 1900-2000.

U.S. Real GDP. 1800 to 1900.
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In 1900, RGDP was $456,861 millions. By 2000, RGDP multiplied by 27x to $12,559,700 millions, which is an annualized growth rate of 3.3% p.a.. The rate from the OLS trend line is 3.5% p.a.

Table 1 summarizes Real GDP growth for the 19th and 20th centuries.

Table 1. Real GDP, Gains and Growth Rates by Century
Period Start GDP
(mil. 2005 $)
End GDP
(mil. 2005 $)
Gain Annualized
Growth Rate
1800-1900 7,994 456,861 57x 4.1% p.a.
1900-2000 456,861 12,559,700 27x 3.3% p.a.

Key Observation: The rate of growth of U.S. Real GDP was lower during the 20th century than during the 19th century. In the 19th century, GDP was multiplied by 57x, but only by 27x in the 20th century. Has economic growth been decelerating? Let’s looked more closely at each century.

Real GDP by Half Century

1800-1850
The next graph shows the first half of the 19th century, 1800-1850. The first part of the 19th century was the period of the industrial revolution, which dates from about 1760 to 1820-40. During this time, there was a transition from hand production to machine methods. Water powered mills became widespread and then steam power. The big industry was textile manufacturing.

The steam locomotive was invented in 1804 and railroads were built. The Erie canal opened in 1825. By 1840, rail transportation was widespread and expanding.  Samuel Morse developed an electrical telegraph and Morse code signalling in 1837.

U.S. Real GDP. 1800 to 1850.
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In 1800, RGDP was $7,994 millions. By 1850 RGDP multiplied by 6.7x to $53,575 millions, which is an annualized growth rate of 3.88% p.a.  The rate from the OLS trend line is 3.8% p.a.

1850-1900
The next graph shows a log plot of Real GDP for the second half of the 19th century, 1850-1900.

The second half of the 19th century saw great technological advancements.Refrigeration in 1856. Telephone in 1876. Phonograph in 1877. Light bulb in 1879. Electric motors in 1886 and electric railways and streetcars.

But there were a lot of ups and downs in the economy. Contractions were frequent and long lasting. The longest contraction in U.S. history was from October 1873 to March 1879, now known as the Long Depression. The were a 11 contraction-expansion cycles during the second half of the 19th century

U.S. Real GDP. 1850 to 1900.
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In 1850, RGDP was $53,575 millions. By 1900, RGDP multiplied by 8.5x to $456,861 millions, which is an annualized growth rate of 4.38% p.a. The rate from the OLS trend line is 4.2% p.a.

Key Observation: The rate of growth was higher in the second half of the 19th century than in the first half. During the first half 19th century, GDP was multiplied by 6.7x, but by 8.5x in the second half. The were tremendous technical achievements during the second half century that made everyone more productive.

1900-1950
The next graph shows the first half of the 20th century, 1900-1950. The first part of the 20th century included the Great Depression of the 1930’s and two world wars. The Great Depression was the deepest contraction in U.S. history. And while the economy grew during the wars, there were postwar contractions.

But the first half of the 20th century also saw many new technological innovations. The first flight in 1903 at Kitty Hawk, North Carolina. Modern drugs like penicillin in 1928. Nuclear fission in the 1930’s and 1940’s. Rockets and ballistic missiles in 1942. The atomic bomb in 1945. The transistor in 1947.

The were a 13 contraction-expansion cycles in the first half of the 20th century

U.S. Real GDP. 1900 to 1950.
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In 1900, RGDP was $456,861 millions. By 1950, RGDP multiplied by 4.78x to $2,184,000 millions, which is an annualized growth rate of 3.18% p.a.  The rate from the OLS trend line is 3.0% p.a. This is a slowdown from the previous half century.

1950-2000
The next graph shows a log plot of Real GDP for the second half of the 20th century, 1950-2000.

The second half of the 20th century made great strides in technology. Nuclear power in 1951. Shipping containers and container ships in 1955. Integrated circuits in 1959. Minicomputers in the 1960s. Microcomputers in 1975.  CD-ROM in 1982. World Wide Web in 1990. DVD in 1995.

U.S. Real GDP. 1950 to 2000.
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In 1950, RGDP was $2,184,000 millions. By 2000, RGDP multiplied by 5.75x to $12,559,700 millions, which is an annualized growth rate of 3.56% p.a. The rate from the OLS trend line is 3.4% p.a. This is a higher rate of growth from the first half of the century. There was no Great Depression in the second half of the 20th century to drag the economy down.

The were only 8 contraction-expansion cycles in the second half of the 20th century, which were all short-lived. During most of the time, the economy was expanding. The period 1980-2000 only had 3 short recessions.

Key Observation: The rate of growth was higher in the second half of the 20th century than in the first half. During the first half of the 20th century, GDP was multiplied by 4.78x, but by 5.75x in the second half. The world entered the space age and computer age. What was once the realm of science fiction became reality.

Summary of Real GDP by Half Century
The best half century was 1850-1900. Strangely this was a period with panics, the Long Depression and deflation. The worst half century was 1900-1950 which featured the Great Depression and two world wars.

Growth Rate of Real GDP

Let’s take a look at the year-over-year rate of growth of Real GDP. This chart shows real GDP growth for each year. See Table gdptable-1. A linear trend line is shown in red.

U.S. Real GDP growth by decade. 1800 to 2013.
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Annual growth varies wildly from year to year, and quite a few years had negative growth. Normally, years with negative growth are followed by years with high growth as the economy recovers. The linear trend has a slope of of about -8 basis points per decade.

Real GDP Growth by Two Years
The 1-year growth chart looks very noisy. Let’s simplify it by looking at 2-year growth rate. The next chart shows annualized real GDP growth for each 2-year period. We use annualized growth so that the units are comparable to the 1-year growth chart. See Table gdptable-2

U.S. Real GDP growth by decade. 1800 to 2012.
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Ten 2-year periods had negative growth. The usual suspects are the Great Depression and the end of world wars. Most recently, 2009-2010 had negative growth. The trend line still shows about -8 bps per decade.

The chart is still too noisy to see a trend. Big economic effects often take more than 2 years to play out. For example, major development projects and large-scale public works projects can take 5 or 10 years to complete. Remember the Five-Year Plans? Let’s look at 5-year growth rate.

Real GDP Growth by Half Decade
The next chart shows real GDP growth for each half decade. See Table gdptable-5.

U.S. Real GDP growth by half decade. 1800 to 2010.
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There were two half decades when output shrunk. The five years ending 1935 and 1950 both had negative growth. 1935 was the Great Depression. 1950 was a caused by re-tooling from war production to peacetime production.

The negative trend of -8 bps per decade can still be seen. -8 bps per decade may not sound like a lot, but over a century it amounts to 80 bps, which is the same as 0.8%.

Real GDP Growth by Decade
The next chart shows real GDP growth for each decade. See Table gdptable-10

U.S. Real GDP growth by decade. 1800 to 2010.
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Output grew in every decade. The best decade was 1790-1800 with mean growth rate of 6.27% p.a. The worst decade was 2000-2010 with mean growth rate of 1.64% p.a.

The -8 bps downward trend in growth rate is more evident in this chart.

Real GDP Growth by Quarter Century
Longer periods show longer term trends. A single generation is about a quarter century. In that time, senior management retires, entry-level workers replace them as the new senior managers bringing in new ideas and methods.

The next chart shows real GDP growth for each quarter century. See Table gdptable-25

U.S. Real GDP growth by quarter century. 1800 to 1900.
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This chart shows a smaller downward trend, only -3.5 bps per decade.

The Future: Real GDP Growth in the Twenty-first Century

1913-2013
We are only 14 years into the 21st century, but we can still see how we are doing so far. Look at the past 100 years of Real GDP.

U.S. Real GDP. 1913to 2013.
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In 1914, Real GDP was $647,893 millions. One hundred years later, in 2013, Real GDP was multiplied by 24.2x, which is an annualized growth rate of 3.24% p.a. The rate from the OLS trend line is 3.5% p.a.

In 2000, Real GDP was $12,559,700 millions. in 2013, Real GDP was multiplied by 1.25x, which is an annualized growth rate of a mere 1.74% p.a. This is way below the 3.5% trend over the past 100 years.

Summary & Conclusions

We looked at two centuries, four half centuries, eight quarter centuries or 22 decades of U.S. Real GDP growth. A key observation is that the gain was less during the 20th century (27x) than during the 19th century (57x). However, the second half of each centuries had greater gains than the first half. The half century with the highest growth rate was 1850-1900.

Limited data for the first decade of the 21st century shows that the rate of growth, 1.74% p.a., is far below the 100-year trend, 3.5% p.a. Whether or not this is the “new normal” remains to be seen.

The trend indicates that growth rate of real GDP has been slowing for the past two centuries. The trend line has a downward slope of about -8 basis points per decade, or 80 basis points per century. Following that trend, a gain of 11.8x (2.5% p.a.) might not be an unreasonable expectations for the 21st century.

Forecasting economic growth over the next 86 years is difficult because the future is unknowable.  Major calamities like a Great Depression and world wars can wreak havoc with economic growth.  On the other hand, technical advancement can provide unexpected productivity gains. Technology innovation is the wild card in the deck. For example, a new discovery that allows cheap and plentiful energy can lead to greater economic gains.

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