An Unusual Cycle

Menzie Chinn has been looking into the output gap, or the difference between real and potential G.D.P. -- the highest level of growth that can be sustained before inflation is sparked. He points out that during the past expansion, the economy never quite reached potential:

What's surprising is that all previous recessions (save for the double-dip in '81-'82) were preceded by real G.D.P. exceeding potential G.D.P. When that happens, inflationary pressures build and monetary authorities typically step in to check growth.

Here's a look at how the current cycle has been truly unusual. The blue bars in the following chart show the average output gap for the four quarters prior to -- and the first two quarters of -- the last eight recessions. The orange bars show the output gap for the current cycle, assuming that the recession started in January (I estimated the output gap for the second quarter of the current recession using monthly GDP data from e-forecasting.com):