## _wp13214 ## Source details **Canonical URL:** [_wp13214](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp13214.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp13214.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp13214.pdf.json) --- ### Introduction and Motivation - Problem statement: - Many individuals lack basic economic theory and are confused by numerous and complex economic statistics reported in the media. - Key contributing factors: the sheer number of economic statistics, their complexity, potential media reporting biases, a lack of historical context, and a lack of context vis-à-vis other statistics. - Consequences: - Households and investors may be unable to decide whether to invest in real assets, change asset allocation, alter retirement savings, or invest in education. - Businesses face uncertainty when determining wage increases, investing in new projects, or allocating capital and labor. - Politicians, policy advisors, and voters often lack tools to assess current macroeconomic performance relative to prior periods or trading partners. ### The Economy Performance Index (EPI): Purpose and Components - Purpose: a simple, transparent macro indicator measuring performance of the economy’s three primary segments: households, firms, and government. - EPI subcomponents (variables that influence all three sectors simultaneously): - Inflation rate (monetary stance). - Unemployment rate (production stance). - Budget deficit as a percentage of total GDP (fiscal stance). - Change in real GDP (aggregate performance). - Frequency and outputs: - EPI can be calculated annually, quarterly, or monthly and produces a raw score and a performance grade for clear communication. ### EPI Methodology — Key Parameters - Normalize optimal EPI score to 100%; any score below 100% is a decrease in economic performance. - Nominal desired values for subcomponents (Appendix A): - Desired inflation rate (I*) = 0.0%. - Desired unemployment rate (U*) = 4.75%. - Desired government deficit as a share of GDP (Def/GDP*) = 0.0%. - Desired change in GDP (ΔGDP*) = 4.75%. ### Raw EPI Construction (Equal Weights) - Raw EPI formula: - Raw EPI = 100% - |Inf(%)–I*| - (Unem(%)–U*) - (Def/GDP(%)–Def/GDP*) + (ΔGDP(%)–ΔGDP*) - With chosen desired values simplifies to: - Raw EPI = 100% - | Inf(%) | - Unem(%) - Def/GDP(%) + ΔGDP(%) - Interpretation examples: - If inflation increases from 2% to 3%, the EPI score falls by 1 percentage point. - A 1 percentage point increase in unemployment reduces the EPI score by 1 percentage point. - An increase (decrease) in the budget deficit lowers (raises) the EPI score accordingly. - An increase (decrease) in percentage GDP growth raises (lowers) the EPI score proportionately. ### Weighted EPI Construction (Normalized by Volatility) - Rationale: smooth scores, capture trends, and make cross-country comparisons more consistent. - Weighting method: - Wi is calculated by taking the inverse standard deviation of each variable multiplied by the average standard deviation of all variables so the average of weights equals one. - Assigns smaller weights to more volatile variables and bigger weights to less volatile variables. - Weighted EPI formula: - Weighted EPI = 100% - WInf * |Inf(%)–I*| - WUnem * (Unem(%)–U*) - WDef * (Def/GDP(%)–Def/GDP*) + WGDP * (ΔGDP(%)–ΔGDP%) ### Empirical Implementation for the U.S. (1790–2012) — Key Statistics and Diagnostics - U.S. variable statistics (Average Std. Dev. row): - Average Std. Dev.: Inflation 4.69; Unemployment 4.39; Def/GDP 5.04; GDP growth 5.51; Average 4.9 - Weights: 0.21, 0.23, 0.20, 0.18, Average 0.2 - Weights (normalized): 1.04, 1.11, 0.97, 0.88, Average 1.00 - Raw vs. Weighted: - Correlation between Raw EPI and Weighted EPI is 0.998. - Descriptive statistics (1790-2009): - Raw EPI: Mean 91.746; Median 92.800; Maximum 116.800; Minimum 49.500; Std. Dev. 8.962; Skewness -0.954; Kurtosis 5.392 - Weighted EPI: Mean 91.559; Median 92.900; Maximum 115.100; Minimum 49.200; Std. Dev. 8.850; Skewness -1.059; Kurtosis 5.556 - Autocorrelations: - Raw EPI AC(1) 0.546; AC(2) 0.344; AC(3) 0.204; AC(4) 0.108; AC(5) 0.036 - Weighted EPI AC(1) 0.587; AC(2) 0.381; AC(3) 0.234; AC(4) 0.131; AC(5) 0.058 - Note: For many emerging market economies normalized (weighted) data is essential due to higher volatility (e.g., inflation), which would alter weights meaningfully. ### Grading and Score Distribution - For presentation, the Raw EPI is used as "the EPI". - U.S. (1790-2009) distribution summary: - Mean EPI score 91.83; median 92.8; standard deviation 8.98. - Grading thresholds (bell-curve style, symmetric around median with wider intervals as performance worsens): - Score ranges and grades: - 95-100 / ≥ 99: A+ — Excellent - 96-99: A - 95-96: A- - 90-95: B+ — Good - 91-94: B - 90-91: B- - 80-90: C+ — Fair - 83-87: C - 80-83: C- - 60-80: D+ — Poor - 66-74: D - 60-66: D- - Less than 60 / <60: F — Fail - Performance scale descriptors: - "Superior" for scores above 100; - "Excellent" for scores 95-99.99; - "Good" for scores 90-94.99; - "Fair" for scores 80-89.99; - "Poor" for scores 60-79.99; - "Fail" for scores below 60. - Note: for the U.S., only one observation (the Great Depression) had an EPI score less than 60. ### The EPI and U.S. Economic History — Periodization and Representative Statistics - Fourteen historical periods (1790–2012) used to evaluate U.S. performance: - The Founding Years: 1790-1811 - The War of 1812: 1812-1815 - The Industrial Revolution: 1816-1860 - The Civil War: 1861-1865 - The Gilded Age: 1866-1889 - The Progressive Era (excluding WWI): 1890-1913 - World War I and its aftermath: 1914-1920 - The Roaring 20s: 1921-1929 - The Great Depression: 1930-1940 - World War II (including lifting of wartime controls): 1941-1947 - Post-War Prosperity: 1948-1967 - Stagflation and Malaise: 1968-1981 - The Reagan Revolution and the New Economy: 1982-1999 - The Post-Millennium Period: 2000-2012 - Representative period summaries (selected averages and EPI outcomes; values preserved as presented): - The Founding Years: Average Year End Inflation Rate: 2.0; Unemployment Rate used: 6.7; Average Budget Deficit As A Percent of GDP: -0.3; Average Change In Real GDP (%): 3.9; Average Raw EPI Score (%): 92.7 B; Average Weighted EPI Score (%): 92.4 B - The War of 1812 (1812-1815): Average Year End Inflation Rate: 4.7; Unemployment Rate used: 6.7; Average Budget Deficit As A Percent of GDP: 2.1; Average Change In Real GDP (%): 3.0; Average Raw EPI Score (%): 83.4 C; Average Weighted EPI Score (%): 83.0 C - The Industrial Revolution (1816-1860): Average Year End Inflation Rate: -1.3; Unemployment Rate used: 6.7; Average Budget Deficit As A Percent of GDP: -0.3; Average Change In Real GDP (%): 4.1; Average Raw EPI Score (%): 94.1 B+; Average Weighted EPI Score (%): 93.8 B - The Civil War (1861-1865): Average Year End Inflation Rate: 14.8; Unemployment Rate used: 6.7; Average Budget Deficit As A Percent of GDP: 6.6; Average Raw EPI Score (%): 75.3 D+; Average Weighted EPI Score (%): 74.9 D - The Gilded Age (1866-1889): Average Year End Inflation Rate: -2.3; Average Unemployment Rate used: 5.1; Average Budget Deficit As A Percent of GDP: -0.7; Average Change In Real GDP (%): 4.5; Average Raw EPI Score (%): 97.5 A; Average Weighted EPI Score (%): 97.4 A - The Progressive Era (1890–1913): Average Year End Inflation Rate: 0.3; Average Unemployment Rate: 5.7; Average Budget Deficit As A Percent of GDP: 0.0; Average Change In Real GDP (%): 3.7; Average Raw EPI Score (%): 96.4 A; Average Weighted EPI Score (%): 96.4 A - World War I and aftermath (1914-1920): Average Year End Inflation Rate: 10.8; Average Unemployment Rate: 5.4; Average Budget Deficit As A Percent of GDP: 4.6; Average Change In Real GDP (%): 2.0; Average Raw EPI Score (%): 81.2 C-; Average Weighted EPI Score (%): 81.2 C- - The Roaring 20s (1921-1929): end-1929 Raw EPI Score 104.6 A+; Weighted EPI Score 104.6 A+; EPI recorded seven consecutive years of Excellent performance for 1923-1929 - The Great Depression (1930–1940): EPI dropped from Raw EPI Score 104.6 (end-1929) to Raw EPI Score 49.5 (end-1933); Selected annual indicators include 1932 Raw EPI Score 49.5 and Unemployment Rate 23.6 - World War II and immediate aftermath (1941–1947): EPI averaged Fair for 1941–1947; 1941 Raw EPI Score 97.9; 1942 Raw EPI Score 88.6; 1946 Raw EPI Score 69.5 - Post-War Prosperity (1948–1967): Average Inflation Rate 2.1%; Average Unemployment Rate 4.8%; Average Budget Deficit As A Percent of GDP 0.2%; Average Change In Real GDP 4.1%; Average Raw EPI Score 96.9 - Stagflation and Malaise (1968–1981): Average Inflation Rate 7.5%; Average Unemployment Rate 6.0%; Average Budget Deficit As A Percent of GDP 1.6%; Average Change In Real GDP 3.1%; Average Raw EPI Score 88.0 - Reagan Revolution and the New Economy (1982–1999): Average Inflation Rate 3.4%; Average Unemployment Rate 6.3%; Average Budget Deficit As A Percent of GDP 2.7%; Average Change In Real GDP 3.4%; Average Raw EPI Score 90.9 - Post-Millennium Period (2001–2012): Average Inflation Rate 2.4%; Average Unemployment Rate 6.5%; Average Budget Deficit As A Percent of GDP 4.5%; Average Change In Real GDP 1.6%; Economic Performance Index score for 2001–2012: 88.3 (C+) ### All Economic Periods — Table 20 aggregates (selected preserved rows) - Example period stat blocks (values preserved as presented): - "2 The War of 1812 1812-1815" — 4.7 6.7 2.1 3.0; score block: 92.7 B; range: 81.6 99.4 - "3 The Mid-Industrial Revolution 1816-1860" — -1.3 6.7 -0.3 4.1; score block: 83.4 C; range: 75.1 91.8 - "4 The American Civil War 1861-1865" — 14.8 6.7 6.6 3.4; score block: 94.1 B+; range: 83.6 104.4 - "5 The Gilded Age 1866-1889" — -2.3 5.1 -0.7 4.5; score block: 75.3 D; range: 67.5 86.9 - "6 The Progressive Era (excluding WWI) 1890-1913" — 0.3 5.7 0.0 3.7; score block: 97.5 A; range: 85.4 116.8 - "7 World War I and its aftermath 1914-1920" — 10.8 5.4 4.6 2.0; score block: 96.4 A; range: 77.4 109.6 - "8 The Roaring 20s 1921-1929" — -1.6 5.4 -0.9 4.1; score block: 81.2 C-; range: 66.1 99.6 - "9 The Great Depression 1930-1940" — -1.7 17.9 3.0 2.0; score block: 96.8 A; range: 76.4 108.0 - "10 World War II and War Decommission 1941-1947" — 7.0 3.9 14.1 6.7; score block: 77.4 D+; range: 49.5 90.2 - "11 Post-War Prosperity 1948-1967" — 2.1 4.8 0.2 4.1; score block: 81.8 C-; range: 69.5 97.9 - "12 1st Modern Stagnation 1968-1981" — 7.5 6.0 1.6 3.1; score block: 96.9 A; range: 88.8 101.6 - "13 Reagan Revolution and the New Economy 1982-2000" — 3.4 6.3 2.7 3.4; score block: 88.0 C; range: 78.5 95.1 - "14 The Post-Millennium Period: 2000-2012 2001-present" — 2.3 6.6 4.3 1.6; score block: 90.9 B-; range: 78.8 99.7 ### EPI and Recessions — Empirical Findings - EPI captures official recessions relatively well (annual data 1890–2009; quarterly data 1960–2012). - EPI typically indicates negative changes in the economic environment, on average, two to three quarters before the NBER officially announces a recession (authors do not claim full leading-indicator status). - Historical examples: - Mid- and late-1970s recessions: EPI fell severely, scoring Cs and Ds. - Dot-com bubble 2000-2001: EPI began falling before experts recognized the downturn. - Great Recession beginning 2008: EPI declined sharply; worst since WWII but not on Great Depression scale. - 1943: Despite GDP growth 16.4 percent, inflation 6.1 percent and deficit-to-GDP 30.3 percent caused EPI to fall from almost 98% in 1941 to 78% in 1943 (D+), illustrating GDP alone can be misleading. - Recession ranking (Table 22) — selected ranks with Average EPI Score and Grade: - 1 August 1929 — March 1933: 65.7 D- - 2 August 1918 — March 1919: 71.3 D - 3 February 1945 — October 1945: 73.2 D - 12 December 2007 — June 2009: 86.4 C - 31 May 1923 — July 1924: 103.2 A+ ### EPI and Other Indexes — Comparative Analysis - Comparison with CFNAI (Chicago Fed National Activity Index): - OLS regression of EPI on CFNAI (1968-2012) — Table 23: - C coefficient: 89.32279; Std. Error: 0.738605; t-Statistic: 120.9344; Prob.: 0.0000 - CFNAI coefficient: 3.956820; Std. Error: 1.054650; t-Statistic: 3.751785; Prob.: 0.0005 - R-squared: 0.246617; Adjusted R-squared: 0.229097 - Mean dependent var: 89.30938; S.D. dependent var: 5.643044 - Comparison with CEI (The Conference Board Coincident Economic Index®): - OLS regression of EPI on CEI (1968-2012) — Table 24: - CEI coefficient: 1.915007; Std. Error: 0.393016; t-Statistic: 4.872593; Prob.: 0.0000 - C coefficient: 87.80923; Std. Error: 0.876752; t-Statistic: 100.1529; Prob.: 0.0000 - R-squared: 0.317654; Adjusted R-squared: 0.304275 - Mean dependent var: 90.46134; S.D. dependent var: 5.999201 - Overall finding: the EPI produces dynamics similar to CFNAI and CEI despite being simpler. ### Conclusion — Findings, Limitations, and Future Work - Summary findings: - The EPI is a composite indicator combining inflation, unemployment, government deficit, and GDP growth into a single metric. - Transparent, relatively simple, accessible for laypersons, and applicable to any economy. - Historical review (1790–2012) shows EPI reflects major events (wars, booms, panics, recessions, depressions). - EPI captures official recessions and allows measurement/comparison of recession severity across eras. - EPI dynamics are similar to CFNAI and CEI. - Caveats and future work: - The index is methodological in nature; ongoing analysis needed to extend applications. - Critics may view EPI as "too simple" or argue it omits relevant variables; authors acknowledge these perspectives while emphasizing EPI achieves its goal of providing an independent, meaningful, and simple evaluation of economic performance. ### Appendix A — Desired EPI Values (definitions and rationale) - Desired values used in the EPI: - Desired inflation rate (I*) = 0.0%. - Desired unemployment rate (U*) = 4.75%. - Desired government deficit as a share of GDP (Def/GDP*) = 0.0%. - Desired change in GDP (ΔGDP*) = 4.75%. - Rationale highlights: - Desired inflation: set to 0.0% because theoretical negative-optimum results are not supported by recent research and numerical estimates are limited; cross-country differences accounted by raw and normalized scores. - Desired unemployment: set to 4.75% for simplicity and comparability; consistent with the 34% quintile of the U.S. unemployment distribution. - Desired budget deficit: 0.0% (balanced over budget cycles) consistent with tax-smoothing and intertemporal budget considerations. - Desired GDP growth: 4.75% chosen noting U.S. historical mean growth rate = 3.7% and median = 3.7%; 4.75% annual growth approximately doubles GDP every 15 years. *Source: _wp13214.* ### Introduction ### Introduction ### Problem Statement and Motivation - Many individuals lack basic economic theory and are confused by numerous and complex economic statistics reported in the media. - Key contributing factors: - the sheer number of economic statistics, their complexity, and potential reporting biases by the media; - a lack of historical context necessary to capture and convey economic trends; - a lack of context vis-à-vis other statistics (not all statistics are created equal). - Consequences: - Households and investors may be unable to decide whether to invest in real assets, change asset allocation, alter retirement savings, or invest in education. - Businesses face uncertainty when determining wage increases, investing in new projects, or allocating capital and labor. - Politicians, policy advisors, and voters often lack tools to assess current macroeconomic performance relative to prior periods or trading partners, leading to reliance on ad hoc metrics. ### The Economy Performance Index (EPI): Purpose and Components - Purpose: a simple, transparent macro indicator measuring performance of the economy’s three primary segments: households, firms, and government. - EPI comprises variables that influence all three sectors simultaneously: - the inflation rate as a measure of the economy’s monetary stance; - the unemployment rate as a measure of the economy’s production stance; - the budget deficit as a percentage of total GDP as a measure of the economy’s fiscal stance; and - the change in real GDP as a measure of the aggregate performance of the entire economy. - EPI can be calculated annually, quarterly, or monthly and produces a raw score and a performance grade for clear communication. ### EPI Methodology — Overview - Normalize the optimal EPI score to 100% and define any score below 100% as a decrease in economic performance. - Nominal desired values for subcomponents (see Appendix A for discussion): - desired inflation rate (I*) is 0.0%; - desired unemployment rate (U*) is 4.75%; - desired government deficit as a share of GDP (Def/GDP*) is 0.0%; - desired change in GDP (ΔGDP*) is 4.75%. - EPI score behavior: - falls when the inflation rate deviates from I*; - falls when unemployment rises above U*; - falls when government deficit rises above Def/GDP*; - rises with positive growth in GDP above ΔGDP*. ### Raw EPI Construction (Equal Weights) - Raw EPI formula: - Raw EPI = 100% - |Inf(%)–I*| - (Unem(%)–U*) - (Def/GDP(%)–Def/GDP*) + (ΔGDP(%)–ΔGDP*) - With the chosen desired values, simplifies to: - Raw EPI = 100% - | Inf(%) | - Unem(%) - Def/GDP(%) + ΔGDP(%) - Interpretation examples: - If inflation increases from 2% to 3%, the EPI score falls by 1 percentage point. - A 1 percentage point increase in unemployment reduces the EPI score by 1 percentage point. - An increase (decrease) in the budget deficit lowers (raises) the EPI score accordingly. - An increase (decrease) in percentage GDP growth raises (lowers) the EPI score proportionately. ### Weighted EPI Construction (Normalized by Volatility) - Purpose: smooth scores, capture trends, make cross-country comparisons more consistent. - Weights defined by inverse standard deviation method: - Wi is calculated by taking the inverse standard deviation of each variable multiplied by the average standard deviation of all variables so the average of weights equals one. - This assigns smaller weights to more volatile variables and bigger weights to less volatile variables. - Weighted EPI formula: - Weighted EPI = 100% - WInf * |Inf(%)–I*| - WUnem * (Unem(%)–U*) - WDef * (Def/GDP(%)–Def/GDP*) + WGDP * (ΔGDP(%)–ΔGDP*) - Note: procedure similar to The Conference Board CEI and CFNAI normalization approaches. ### Empirical Implementation for the U.S. (1790–2009 / 1790–2012) - We calculate both Raw and Weighted EPI scores for the U.S. from 1790 to 2012 (figures and appendices referenced). - U.S. variable statistics (Average Std. Dev. row shows standard deviations; Weights and Weights (normalized) rows shown): - Average Std. Dev.: Inflation 4.69; Unemployment 4.39; Def/GDP 5.04; GDP growth 5.51; Average 4.9 - Weights: 0.21, 0.23, 0.20, 0.18, Average 0.2 - Weights (normalized): 1.04, 1.11, 0.97, 0.88, Average 1.00 - For the U.S., weights are close to unity; Raw and Weighted EPI dynamics are very similar. - Correlation between Raw EPI and Weighted EPI is 0.998. - Descriptive statistics (1790-2009): - Raw EPI: Mean 91.746; Median 92.800; Maximum 116.800; Minimum 49.500; Std. Dev. 8.962; Skewness -0.954; Kurtosis 5.392 - Weighted EPI: Mean 91.559; Median 92.900; Maximum 115.100; Minimum 49.200; Std. Dev. 8.850; Skewness -1.059; Kurtosis 5.556 - Autocorrelation coefficients (AC): - Raw EPI AC(1) 0.546; AC(2) 0.344; AC(3) 0.204; AC(4) 0.108; AC(5) 0.036 - Weighted EPI AC(1) 0.587; AC(2) 0.381; AC(3) 0.234; AC(4) 0.131; AC(5) 0.058 - The authors note that for many emerging market economies, normalized (weighted) data is essential due to higher volatility (e.g., inflation), which would alter weights meaningfully. ### Grading and Score Distribution - For presentation, the Raw EPI is used as "the EPI". - Distribution summary (U.S., 1790-2009): - Mean EPI score of 91.83; median 92.8; standard deviation 8.98. - Grading thresholds emulate a bell curve symmetric around the median with wider intervals as performance worsens: - Quintile thresholds tied to distribution quantiles: Top 10% (>90% quantile) corresponds to +40% deviation above median; Next 20% (70% quantile) +20% above median; Next 40% (30% quantile) -20% above median; Next 20% (10% quantile) -40% above median; Bottom 10% <10% quantile. - Table of score ranges and grades: - 95-100 / ≥ 99: A+ — Excellent - 96-99: A - 95-96: A- - 90-95: B+ — Good - 91-94: B - 90-91: B- - 80-90: C+ — Fair - 83-87: C - 80-83: C- - 60-80: D+ — Poor - 66-74: D - 60-66: D- - Less than 60 / <60: F — Fail - Performance scale descriptors implemented: - "Superior" for scores above 100; - "Excellent" for scores 95-99.99; - "Good" for scores 90-94.99; - "Fair" for scores 80-89.99; - "Poor" for scores 60-79.99; - "Fail" for scores below 60. - Note: for the U.S., only one observation (the Great Depression) had an EPI score less than 60. *Source: _wp13214 - Introduction (EPI methodology and U.S. application, 1790–2012).* ### 3. The EPI and U.S. Economic History ### 3. The EPI and U.S. Economic History ### Overview and methodology - The analysis uses the Economic Performance Index (EPI) to evaluate U.S. economic performance from 1790 through 2012. - Fourteen historical periods identified (see figures referenced in source): - The Founding Years: 1790-1811 - The War of 1812: 1812-1815 - The Industrial Revolution: 1816-1860 - The Civil War: 1861-1865 - The Gilded Age: 1866-1889 - The Progressive Era (excluding WWI): 1890-1913 - World War I and its aftermath: 1914-1920 - The Roaring 20s: 1921-1929 - The Great Depression: 1930-1940 - World War II (including the lifting of wartime controls): 1941-1947 - Post-War Prosperity: 1948-1967 - Stagflation and Malaise: 1968-1981 - The Reagan Revolution and the New Economy: 1982-1999 - The Post-Millennium Period: 2000-2012 - Most statistical series (inflation, unemployment, budget deficits, change in GDP) are available from 1790 except unemployment; unemployment data are unavailable for pre-modern periods and a historical average of 6.7 percent was used where noted. - Primary historical statistical source: “Historical Statistics of the United States: Millennial Edition” (2006). A complete discussion of data sources is in Appendix B (per source). ### High-level patterning from the EPI and figures - Figures 4 and 5 (EPI for the United States, 1790-1900 and 1900-2012) display EPI Score, EPI Score (Smoothed), and CEPPI Score across time with annotations for major events (panics, wars, recessions). - The EPI tracks pronounced declines during major wars and panics and strong performance during industrial expansion and the Gilded Age. ### The Founding Years: 1790-1811 — summary and key statistics - Context: U.S. Constitution (1787) established unified market; dominant trends: government institution development, western expansion, early industrialization. - Policy/political highlights: Alexander Hamilton’s national credit, tariffs, whiskey tax, First Bank of the United States (1791-1811); Jeffersonian decentralization and Louisiana Purchase (1803); Madison allowed First Bank charter to expire (1811) but later supported Second Bank after War of 1812. - Regional/economic developments: cotton expansion post-1793 cotton gin; Great Britain received 80% of U.S. cotton and 50% of other U.S. exports; trade frictions with Britain amid Napoleonic Wars. - Performance summary (from Table 6 annual and summary statistics): - Average Year End Inflation Rate: 2.0 - Unemployment Rate used: 6.7 - Average Budget Deficit As A Percent of GDP: -0.3 - Average Change In Real GDP (%): 3.9 - Average Raw EPI Score (%): 92.7 B - Average Weighted EPI Score (%): 92.4 B - Min and Max for period: - Min Year End Inflation Rate: -15.7 - Max Year End Inflation Rate: 14.4 - Min Raw EPI Score (%): 82.1 - Max Raw EPI Score (%): 99.4 - Narrative conclusion: Generally performed at a B (Good) level prior to War of 1812; prices rose only 2% on average; deficits were virtually non-existent (balanced or surplus 17 out of 21 years); GDP growth averaged 3.9%. ### The War of 1812: 1812-1815 — summary and key statistics - Context: British blockade and interdiction of U.S. trade amid Napoleonic Wars; maritime and naval inferiority. - Economic impact: exports fell from $130 million in 1807 to $7 million in 1814 (source text); national debt rose from $45 million in 1812 to $127 million by 1815; severe disruptions to shipping and commerce; Treaty of Ghent signed December 24, 1814 (ratified February 16, 1815). - Performance summary (Table 7): - Yearly Year End Inflation Rates: 1812: 1.3; 1813: 20.0; 1814: 9.9; 1815: -12.3 - Unemployment Rate used: 6.7 (each year) - Budget Deficit As A Percent of GDP (annual): 1812: 1.3; 1813: 2.1; 1814: 2.8; 1815: 2.0 - Change In Real GDP (%) annual: 1812: 1.1; 1813: 3.9; 1814: 4.7; 1815: 2.4 - Average Year End Inflation Rate for period: 4.7 - Average Budget Deficit As A Percent of GDP: 2.1 - Average Change In Real GDP (%): 3.0 - Average Raw EPI Score (%): 83.4 C - Average Weighted EPI Score (%): 83.0 C - Min and Max for period: - Min Raw EPI Score (%): 75.1 - Max Raw EPI Score (%): 91.8 - Narrative conclusion: EPI records a fall in economic conditions during the war — inflation surged in 1813-1814 (prices rising almost 30% across those years), followed by a fall of just over 12% in 1815; overall average EPI was 83.4 (Fair). ### The Industrial Revolution: 1816-1860 — summary and key statistics - Context: Rapid spread of industrialization in U.S.; Whig “American System” (high tariffs, high public land prices, preservation of Bank, internal improvements); renewal of Second Bank charter (1816); transportation improvements (Cumberland Pike 1818, Erie Canal 1825); Jackson’s vetoes and Specie Circular leading to Panic of 1837 and bank failures. - Structural change: migration to Midwest, railroads expansion, railroads attracted domestic and European investment, rise of managerial corporations, discovery of gold increased wealth. - Social/demographic: by 1860, 16% of population in cities of at least 2,500; one third of national income from manufacturing; estimated 300,000 immigrants annually between 1845 and 1855. - Performance summary (Table 8): - Average Year End Inflation Rate: -1.3 - Unemployment Rate used: 6.7 - Average Budget Deficit As A Percent of GDP: -0.3 - Average Change In Real GDP (%): 4.1 - Average Raw EPI Score (%): 94.1 B+ - Average Weighted EPI Score (%): 93.8 B - Period Min and Max: - Min Year End Inflation Rate: -10.6 - Max Year End Inflation Rate: 8.6 - Min Raw EPI Score (%): 83.6 - Max Raw EPI Score (%): 104.4 - Narrative conclusion: Despite panics and recessions (notably the Panic of 1837), long-term growth continued; GDP growth strong and averaged 4.1% with general good EPI scores. ### The Civil War: 1861-1865 — summary and key statistics - Context: North industrializing; South rural and slave-dependent; Republican victory of 1860 precipitated secession; large-scale conflict and funding needs. - Fiscal and price impacts: Morrill Tariff revised upward; wartime deficits and inflation severe in North and disastrous in South; Confederacy resorted to inflating currency; national sacrifices and casualties (620,000 soldier deaths). - Performance summary (Table 9): - Year End Inflation Rates (annual): 1861: 6.0; 1862: 14.2; 1863: 24.8; 1864: 25.2; 1865: 3.7 - Unemployment Rate used: 6.7 - Budget Deficit As A Percent of GDP (average war years): 6.6 - Change In Real GDP (%) annual: 1861: 0.5; 1862: 7.7; 1863: 8.2; 1864: 6.3; 1865: 10.2 (note 1865 entry shows -2.9 in table cell formatting but summarized as 10.2 in the printed row; the table lists 1865 Change In Real GDP (%) as -2.9 then shows 76.4 D+ 77.3 D+—use values as presented in table rows) - Average Year End Inflation Rate for period: 14.8 - Average Raw EPI Score (%): 75.3 D+ - Average Weighted EPI Score (%): 74.9 D - Min and Max for period: - Min Raw EPI Score (%): 67.5 - Max Raw EPI Score (%): 86.9 - Narrative conclusion: EPI records dramatic fall in economic conditions; inflation surged in 1862-1864 (price level almost doubled by war’s end); deficits averaged 6.6% of GDP; GDP growth averaged 3.4% but concentrated in the North; overall average EPI 75.3 (Poor), the worst of the 14 periods. ### The Gilded Age: 1866-1889 — summary and key statistics - Context: Creation of modern industrial economy, national transportation/communication networks, rise of corporations, managerial revolution, rapid industrial and per capita income growth; heavy industry and railroads dominant; railroads tripled mileage between 1860 and 1880. - Labor and social dynamics: urbanization, immigrant labor, rising middle class, labor movement origins, concerns about corruption and monopolies, calls for laissez-faire and sometimes high tariffs. - Panics: Panic of 1873 (Jay Cooke & Company bankruptcy), Long Depression (NBER records 65 months contraction), Panic of 1884 (European gold depletion triggers domestic banking strains). - Performance summary (Table 10): - Average Year End Inflation Rate: -2.3 - Average Unemployment Rate used (where applicable): 5.1 - Average Budget Deficit As A Percent of GDP: -0.7 - Average Change In Real GDP (%): 4.5 - Average Raw EPI Score (%): 97.5 A - Average Weighted EPI Score (%): 97.4 A - Min and Max for period: - Min Year End Inflation Rate: -6.8 - Max Year End Inflation Rate: 8.3 - Min Raw EPI Score (%): 85.4 - Max Raw EPI Score (%): 116.8 - Narrative conclusion: Despite panics, the EPI records excellent performance overall; inflation averaged a fall of 2.3% per year; budget surpluses averaged 0.7% of GDP; GDP growth averaged 4.5% per year; the period ranks 4th out of 14. ### The Progressive Era (excluding WWI): 1890–1913 — summary and key statistics - Context: Shift toward government regulation and intervention to curb trusts and monopolies; rise of the Progressive movement, muckrakers, and reform pressures. - Major panics and crises: Panic of 1893 (railroad overbuilding, bank failures), 1896 panic (silver/gold concerns), Panic of 1907 (bank runs, industrial production fell 11%, imports down 26%, unemployment rose from 3% to 8%). - Institutional change: Panic of 1907 led to Aldrich–Vreeland Act and National Monetary Commission; Federal Reserve Act passage culminated with regional banks commencing operations in November 1914 (12 regional banks; Federal Reserve Act took effect in November, 1914). - Performance summary (Table 11): - Average Year End Inflation Rate: 0.3 - Average Unemployment Rate: 5.7 - Average Budget Deficit As A Percent of GDP: 0.0 (virtually balanced) - Average Change In Real GDP (%): 3.7 - Average Raw EPI Score (%): 96.4 A - Average Weighted EPI Score (%): 96.4 A - Period Min and Max: - Min Year End Inflation Rate: -4.6 - Max Year End Inflation Rate: 4.6 - Min Raw EPI Score (%): 77.4 - Max Raw EPI Score (%): 109.6 - Narrative conclusion: Economic conditions generally Excellent with low inflation, mild unemployment, mild deficits/surpluses, and GDP growth of 3.7% between 1890 and 1913; exceptions in 1904, 1908 and 1910 align with recessionary activity. ### World War I and immediate aftermath: 1914-1920 — summary and key statistics - Rationale for separate period: dramatic economic upheaval from war spending, deficits, money creation, and double-digit inflation. - Performance summary (Table 12): - Year End Inflation Rates (annual): 1914: 1.0; 1915: 1.0; 1916: 7.9; 1917: 17.4; 1918: 18.0; 1919: 14.6; 1920: 15.6 - Unemployment Rate (annual): 1914: 8.5; 1915: 9.0; 1916: 6.5; 1917: 5.2; 1918: 1.2; 1919: 2.3; 1920: 5.2 - Budget Deficit As A Percent of GDP (annual): 1914: 0.0; 1915: 0.2; 1916: -0.1; 1917: 1.6; 1918: 13.3; 1919: 17.5; 1920: -0.3 - Change In Real GDP (%) annual: 1914: -7.9; 1915: 2.7; 1916: 13.9; 1917: -2.7; 1918: 9.3; 1919: 0.4; 1920: -1.5 - Average Year End Inflation Rate for period: 10.8 - Average Unemployment Rate: 5.4 - Average Budget Deficit As A Percent of GDP: 4.6 - Average Change In Real GDP (%): 2.0 - Average Raw EPI Score (%): 81.2 C- - Average Weighted EPI Score (%): 81.2 C- - Period Min and Max: - Min Raw EPI Score (%): 66.1 - Max Raw EPI Score (%): 99.6 - Narrative conclusion: Progressive Era effectively ends with WWI; EPI registers Poor for 1917-1920 due to large deficits in 1918-1919 and double-digit inflation; average EPI 81.2 (C-). ### The Roaring 20s: 1921-1929 — opening observations - Political shift: 1921 Harding elected promising “a return to normalcy.” - Price and fiscal dynamics: postwar inflation fell dramatically; prices fell in 1920 and 1921 during a sharp recession; tariff increases and large tax reductions (top rates reduced from 73% to 24%) under Treasury Secretary Andrew Mellon; government surpluses used to retire about a third of the national debt between 1920 and (text continues beyond provided excerpt). - (Full table for 1921-1929 and subsequent analysis continue in source beyond provided excerpt.) *Source: _wp13214 - 3. The EPI and U.S. Economic History* ### 1930. In addition, Secretary of Commerce, Herbert Hoover, worked to introduce reforms by regulating ### _wp13214 - 1930. In addition, Secretary of Commerce, Herbert Hoover, worked to introduce reforms by regulating many business practices. ### 1920s: Broad prosperity and structural change - Rapid growth of the automobile industry stimulated energy, glass, and road-building sectors and strengthened tourism and retail as consumers traveled further from home. - Urbanization and electrification: millions migrated from the country to cities, leading to sharp increases in construction for offices, factories, and homes powered by the emerging electric power industry and connected by new telephones. - Agriculture did not recover from the wartime bubble in land prices. - The EPI recorded seven consecutive years of Excellent performance for the period of 1923-1929. - EPI peak: end-1929 Raw EPI Score 104.6; Raw EPI Score Performance A+; Weighted EPI Score 104.6; Weighted EPI Score Performance A+. ### The Great Depression: 1930–1940 — causes, policy responses, and outcomes - Trigger and monetary policy: - October 1929 stock market crash eight months into President Herbert Hoover’s term. - The Federal Reserve allowed the money supply to fall by almost one-third over the next three years. - The Fed made little attempt to assist banks; monetary contraction widely considered a major contributor to the Great Depression. - Fiscal and trade policy: - 1930: Smoot-Hawley Tariff Act raised tariffs on thousands of imported items; retaliatory tariff increases abroad reduced international trade and worsened the Depression. - Revenue Act of 1932 measures included: income taxes on the highest incomes rose from 25% to 63%; estate tax doubled; a 13.75% tax on corporations; and a two-cent (over 30 cents in today's dollars) "check tax" on all bank checks. - Social and banking outcomes: - By 1932 U.S. unemployment reached 24.9%. - A drought devastated agricultural production. - Over 5,000 banks collapsed as individuals, businesses, and farmers defaulted on record numbers of loans. - Roosevelt’s New Deal responses: - Franklin Delano Roosevelt elected 1932; enacted numerous programs known as “The New Deal” during his "First 100 Days." - Emergency Banking Act declared a "bank holiday" and allowed a phased reopening of banks; fewer banks reopened than had been open before. - Glass-Steagall Act created the Federal Deposit Insurance Corporation (FDIC). - Fiscal outcomes under Roosevelt: - Government spending increased from 8.0% of GNP under Hoover in 1932 to 10.2% of GNP in 1936 under Roosevelt. - Debt increased from 33.6% of GNP in 1932 to 40.9% in 1936. - Deficit spending was adopted; Keynesian recommendations influenced policy. - EPI and macro indicators: - EPI dropped from Raw EPI Score 104.6 (end-1929) to Raw EPI Score 49.5 (end-1933), the lowest annual EPI score recorded. - EPI improvement 1934–1936, then deterioration with the Recession of 1937 and renewed weakness in 1938; unemployment never fell below 14% after 1933 during the Depression. - Selected annual indicators (excerpt from Table 14): - 1930: Inflation Rate -2.3%; Unemployment Rate 8.9%; Budget Deficit As A Percent of GDP -0.8%; Change In Real GDP -8.6%; Raw EPI Score 81.0; Weighted EPI Score 81.9. - 1931: Inflation Rate -9.0%; Unemployment Rate 15.9%; Budget Deficit As A Percent of GDP 0.6%; Change In Real GDP -6.4%; Raw EPI Score 68.1; Weighted EPI Score 67.9. - 1932: Inflation Rate -9.9%; Unemployment Rate 23.6%; Budget Deficit As A Percent of GDP 4.0%; Change In Real GDP -13.0%; Raw EPI Score 49.5; Weighted EPI Score 49.2. - 1933: Inflation Rate -5.1%; Unemployment Rate 24.9%; Budget Deficit As A Percent of GDP 4.5%; Change In Real GDP -1.4%; Raw EPI Score 64.1; Weighted EPI Score 62.6 (negative performance). ### World War II and immediate aftermath: 1941–1947 - War mobilization and controls: - War Production Board organized national productive capacity to meet military priorities; consumer plants converted for military production. - Office of Price Administration imposed rationing and rent controls; guaranteed cost-plus profits and subsidized wages were implemented. - Labor force shifts: six million women took jobs in manufacturing and production. - Economic performance and cost: - GDP growth was strong; unemployment fell during the war effort. - Massive government budget deficits and unprecedented increases in the national debt followed wartime spending. - The United States tripled its national debt between 1941 and 1946. - Postwar conversion challenges: - Post-war reconversion led to labor-management conflicts, shortages in housing and consumer products, inflation pressures, and a wave of strikes (e.g., national railway strike in spring 1946). - EPI outcomes: - EPI averaged Fair for 1941–1947 due to high GDP growth offset by large war-related deficits. - Selected annual indicators (excerpt from Table 15): - 1941: Inflation Rate 5.0%; Unemployment Rate 9.9%; Budget Deficit As A Percent of GDP 4.3%; Change In Real GDP 17.1%; Raw EPI Score 97.9; Weighted EPI Score 95.9. - 1942: Inflation Rate 10.9%; Unemployment Rate 4.7%; Budget Deficit As A Percent of GDP 14.2%; Change In Real GDP 18.4%; Raw EPI Score 88.6; Weighted EPI Score 87.1. - 1946: Inflation Rate 8.3%; Unemployment Rate 3.9%; Budget Deficit As A Percent of GDP 7.2%; Change In Real GDP -11.1%; Raw EPI Score 69.5; Weighted EPI Score 71.3. ### Post-War Prosperity: 1948–1967 (Golden Era) - Macroeconomic characteristics: - Low inflation, low unemployment, modest deficits, and average GDP growth over 4% per year during the two decades following WWII. - Government increasingly involved in economic planning but less so than in Europe or Marxist economies. - Policy highlights: - Eisenhower expanded Social Security and consolidated it into the Department of Health, Education and Welfare; supported contra-cyclical policies including public works and lower taxes. - Kennedy enacted the largest tax cut in history in 1961; Federal Reserve loosened monetary policy to keep interest rates low. - Johnson’s Revenue Act of 1964 reduced top personal rate from 91% to 70% and top corporate rate from 52% to 48%; Great Society and War on Poverty programs expanded domestic spending. - By 1968 federal spending rose to 20.6% of GDP from 17.2% of GDP three years earlier; the budget deficit rose to almost 3% of GDP from virtually non-existent in 1965. - EPI outcomes: - EPI records twenty years of strong performance with an average EPI score indicating Excellent performance between 1948 and 1967. - Selected annual indicators (excerpt from Table 16): - 1948: Inflation Rate 8.1%; Unemployment Rate 3.8%; Budget Deficit As A Percent of GDP -4.6%; Change In Real GDP 4.3%; Raw EPI Score 97.1; Weighted EPI Score 96.8. - 1955: Inflation Rate -0.4%; Unemployment Rate 4.4%; Budget Deficit As A Percent of GDP 0.8%; Change In Real GDP 7.1%; Raw EPI Score 101.6; Weighted EPI Score 101.3. - 1965: Inflation Rate 1.6%; Unemployment Rate 4.5%; Budget Deficit As A Percent of GDP 0.2%; Change In Real GDP 6.4%; Raw EPI Score 100.1; Weighted EPI Score 99.9. - Period averages and extremes: - Average Inflation Rate 2.1%; Average Unemployment Rate 4.8%; Average Budget Deficit As A Percent of GDP 0.2%; Average Change In Real GDP 4.1%; Average Raw EPI Score 96.9; Average Weighted EPI Score 96.9. - Min Inflation Rate -1.2%; Max Inflation Rate 8.1%. ### Stagflation and Malaise: 1968–1981 - Deterioration begins in late 1960s: - Rising inflation and budget deficits, decelerating GDP growth (average annual growth slowed to 3.1% from the previous 4.1%). - EPI trended downward from a 1965 high of 100.1 to lower levels; performance ranged from Poor (1975 Raw EPI Score 78.5) to Good (1972 Raw EPI Score 95.1). - Selected indicators (excerpt from Table 17): - 1974: Inflation Rate 11.0%; Unemployment Rate 5.6%; Budget Deficit As A Percent of GDP 0.3%; Change In Real GDP -0.5%; Raw EPI Score 82.6; Weighted EPI Score 82.7. - 1979: Inflation Rate 11.3%; Unemployment Rate 5.8%; Budget Deficit As A Percent of GDP 1.1%; Change In Real GDP 3.2%; Raw EPI Score 84.9; Weighted EPI Score 84.6. - Period averages: - Average Inflation Rate 7.5%; Average Unemployment Rate 6.0%; Average Budget Deficit As A Percent of GDP 1.6%; Average Change In Real GDP 3.1%; Average Raw EPI Score 88.0; Average Weighted EPI Score 87.8. ### Reagan Revolution and the “New Economy”: 1982–1999 - Policy mix and macro outcomes: - 1981 tax cuts reducing federal income tax rates by 25% combined with large defense spending increases and continued social spending led to large federal deficits and a tripling of the national debt from $930 billion in 1981 to $2.6 trillion in 1988. - Tight monetary policy under Federal Reserve Chairman Paul Volcker reduced inflation from 13.5% in 1980 to 3% in 1983, causing a sharp recession and peaking unemployment at 10.8% in late 1982. - Post-recession recovery produced falling unemployment and sustained GDP growth; deregulation accelerated. - NAFTA negotiations culminated in a 1992 agreement creating the largest trading block in the world. - EPI performance: - EPI improved from Poor in the late 1980s to Excellent by the late 1990s; federal budget surpluses occurred for four straight years beginning in 1998. - Selected indicators (excerpt from Table 18): - 1982: Inflation Rate 6.2%; Unemployment Rate 9.7%; Budget Deficit As A Percent of GDP 3.4%; Change In Real GDP -1.9%; Raw EPI Score 78.8; Weighted EPI Score 78.9. - 1997: Inflation Rate 2.3%; Unemployment Rate 4.9%; Budget Deficit As A Percent of GDP 0.3%; Change In Real GDP 4.5%; Raw EPI Score 96.9; Weighted EPI Score 96.8. - 1999: Inflation Rate 2.2%; Unemployment Rate 4.2%; Budget Deficit As A Percent of GDP -1.3%; Change In Real GDP 4.8%; Raw EPI Score 99.7; Weighted EPI Score 99.7. - Period averages: - Average Inflation Rate 3.4%; Average Unemployment Rate 6.3%; Average Budget Deficit As A Percent of GDP 2.7%; Average Change In Real GDP 3.4%; Average Raw EPI Score 90.9; Average Weighted EPI Score 90.9. ### The Post-Millennium Period: 2001–2012 - Shocks, policy, and performance: - 2001 mild recession exacerbated by September 11, 2001; $1.35 trillion tax cut enacted under President George W. Bush. - December 2007 marked the start of the longest post-World War II recession including a housing correction, subprime mortgage crisis, soaring oil prices, and a declining dollar. - Stimulus and bailouts by Presidents Bush and Obama sought to stabilize the economy; EPI declined sharply in 2008 and 2009. - Twelve-year averages and EPI: - For 2001–2012: Average Inflation Rate 2.4%; Average Unemployment Rate 6.5%; Average Budget Deficit As A Percent of GDP 4.5%; Average Change In Real GDP 1.6%. - Economic Performance Index score for 2001–2012: 88.3 (a C+ grade). - Selected annual indicators (excerpt from Table 19): - 2001: Inflation Rate 2.8%; Unemployment Rate 4.7%; Budget Deficit As A Percent of GDP -1.2%; Change In Real GDP 1.1%; Raw EPI Score 94.8; Weighted EPI Score 95.0. - 2008: Inflation Rate 3.8%; Unemployment Rate 5.8%; Budget Deficit As A Percent of GDP 3.2%; Change In Real GDP -0.3%; Raw EPI Score 86.9; Weighted EPI Score 87.3. - 2009: Inflation Rate -0.3%; Unemployment Rate 9.3%; Budget Deficit As A Percent of GDP 10.2%; Change In Real GDP -3.5%; Raw EPI Score 76.8; Weighted EPI Score 77.5. - 2012: Inflation Rate 2.1%; Unemployment Rate 8.1%; Budget Deficit As A Percent of GDP 8.5%; Change In Real GDP 2.2%; Raw EPI Score 83.7; Weighted EPI Score 83.8. ### All Economic Periods: comparative perspective - The EPI was used to segment U.S. economic history into fourteen distinct periods to provide relative rankings. - Examples of period rankings from the EPI: - Top performers include The Gilded Age (1866–1889) and Post-WWII Prosperity (1947–1967). - Lowest performers include The Great Depression (1930–1940) and the Civil War period. - The EPI integrates multiple indicators (inflation, unemployment, budget deficits, GDP growth) to generate annual Raw and Weighted EPI Scores and categorical performance labels (e.g., A+, A, B, C, D, F) that reflect overall economic conditions. *Source: _wp13214 - 1930. In addition, Secretary of Commerce, Herbert Hoover, worked to introduce reforms by regulating many business practices.* ### 92.7 B ### _wp13214 - 92.7 B ### EPI historical periods and sample scores - "2 The War of 1812 1812-1815" — 4.7 6.7 2.1 3.0; score block: 92.7 B; range: 81.6 99.4 - "3 The Mid-Industrial Revolution 1816-1860" — -1.3 6.7 -0.3 4.1; score block: 83.4 C; range: 75.1 91.8 - "4 The American Civil War 1861-1865" — 14.8 6.7 6.6 3.4; score block: 94.1 B+; range: 83.6 104.4 - "5 The Gilded Age 1866-1889" — -2.3 5.1 -0.7 4.5; score block: 75.3 D; range: 67.5 86.9 - "6 The Progressive Era (excluding WWI) 1890-1913" — 0.3 5.7 0.0 3.7; score block: 97.5 A; range: 85.4 116.8 - "7 World War I and its aftermath 1914-1920" — 10.8 5.4 4.6 2.0; score block: 96.4 A; range: 77.4 109.6 - "8 The Roaring 20s 1921-1929" — -1.6 5.4 -0.9 4.1; score block: 81.2 C-; range: 66.1 99.6 - "9 The Great Depression 1930-1940" — -1.7 17.9 3.0 2.0; score block: 96.8 A; range: 76.4 108.0 - "10 World War II and War Decommission 1941-1947" — 7.0 3.9 14.1 6.7; score block: 77.4 D+; range: 49.5 90.2 - "11 Post-War Prosperity 1948-1967" — 2.1 4.8 0.2 4.1; score block: 81.8 C-; range: 69.5 97.9 - "12 1st Modern Stagnation 1968-1981" — 7.5 6.0 1.6 3.1; score block: 96.9 A; range: 88.8 101.6 - "13 Reagan Revolution and the New Economy 1982-2000" — 3.4 6.3 2.7 3.4; score block: 88.0 C; range: 78.5 95.1 - "14 The Post-Millennium Period: 2000-2012 2001-present" — 2.3 6.6 4.3 1.6; score block: 90.9 B-; range: 78.8 99.7 - Table label: Table 20. All Economic Periods. ### EPI and recessions — empirical findings - Annual data analyzed from 1890 to 2009; quarterly data available from 1960 to 2012 (Figure 6) and annual dynamics available from 1900 to 2012 (Figure 7). - The EPI "captures official recessions relatively well" as recognized by the National Bureau of Economic Research (NBER). - The EPI typically indicates negative changes in the economic environment, on average, two to three quarters before the NBER officially announces a recession (authors stop short of claiming full leading-indicator status). - Historical examples: - Mid- and late-1970s recessions: EPI fell severely, scoring Cs and Ds. - Dot-com bubble 2000-2001: EPI began falling before experts recognized the downturn. - Great Recession beginning 2008: EPI took a nosedive; characterized as the worst since WWII but not on the scale of the Great Depression. - 1943: GDP grew 16.4 percent, but with inflation 6.1 percent and deficit-to-GDP 30.3 percent the EPI fell from almost 98% in 1941 to 78% in 1943, yielding a D+ for 1943 — illustrating that GDP alone can be misleading. - The EPI enables measuring and comparing the relative severity of recessions (see ranking in Table 22). ### Rank of U.S. recessions (Table 22) — official recessions and average EPI scores - Rankings (Peak — Trough): Average EPI Score — Grade - 1 August 1929 — March 1933: 65.7 D- - 2 August 1918 — March 1919: 71.3 D - 3 February 1945 — October 1945: 73.2 D - 4 January 1920 — July 1921: 77.2 D+ - 5 January 1980 — July 1980: 77.6 D+ - 6 May 1937 — June 1938: 80.1 D+ - 7 July 1981 — November 1982: 80.4 D+ - 8 November 1973 — March 1975: 83.2 C - 9 May 1907 — June 1908: 84.0 C - 10 January 1893 — June 1894: 84.6 C - 11 July 1990 — March 1991: 84.8 C - 12 December 2007 — June 2009: 86.4 C - 13 April 1865 — December 1867: 87.7 C - 14 January 1913 — December 1914: 89.6 C+ - 15 December 1969 — November 1970: 89.9 C+ - 16 June 1869 — December 1870: 92.6 B - 17 August 1957 — April 1958: 93.4 B - 18 March 1887 — April 1888: 93.7 B - 19 January 1910 — January 1912: 93.8 B - 20 October 1873 — March 1879: 94.6 B+ - 21 April 1960 — February 1961: 94.7 B+ - 22 March 2001 — November 2001: 94.9 B+ - 23 September 1902 — August 1904: 95.4 A- - 24 March 1882 — May 1885: 95.7 A- - 25 November 1948 — October 1949: 95.9 A- - 26 December 1895 — June 1897: 96.7 A - 27 July 1953 — May 1954: 97.3 A - 28 October 1926 — November 1927: 99.8 A+ - 29 June 1899 — December 1900: 99.9 A+ - 30 July 1890 — May 1891: 100.0 A+ - 31 May 1923 — July 1924: 103.2 A+ - Note: Annual averages were taken for recessions before 1960 and quarterly averages were taken for recessions after 1960. ### EPI and other indexes — comparative analysis - Purpose: assess whether EPI dynamics are similar to established composite indexes (CFNAI and CEI). EPI and CFNAI (Chicago Fed National Activity Index) - CFNAI: monthly index based on a weighted average of 85 monthly indicators. - Visual comparison of EPI and annualized CFNAI (1968-2012) shows a strong correlation (Figure 8). - OLS regression of EPI on CFNAI (1968-2012) — Table 23: - C coefficient: 89.32279; Std. Error: 0.738605; t-Statistic: 120.9344; Prob.: 0.0000 - CFNAI coefficient: 3.956820; Std. Error: 1.054650; t-Statistic: 3.751785; Prob.: 0.0005 - R-squared: 0.246617; Adjusted R-squared: 0.229097 - Mean dependent var: 89.30938; S.D. dependent var: 5.643044 - Monthly CFNAI data transformed into annual data by taking averages within a year. EPI and CEI (The Conference Board Coincident Economic Index®) - CEI: composite index designed to signal peaks and troughs in the business cycle. - Visual comparison of EPI and annualized CEI dynamics (first differences) points to a strong connection (Figure 9). - OLS regression of EPI on CEI (1968-2012) — Table 24: - CEI coefficient: 1.915007; Std. Error: 0.393016; t-Statistic: 4.872593; Prob.: 0.0000 - C coefficient: 87.80923; Std. Error: 0.876752; t-Statistic: 100.1529; Prob.: 0.0000 - R-squared: 0.317654; Adjusted R-squared: 0.304275 - Mean dependent var: 90.46134; S.D. dependent var: 5.999201 - Monthly CEI data transformed into annual data by taking averages within a year. - Overall finding: simple tests show the EPI can potentially provide an additional, simpler method that produces similar dynamics as the CFNAI and the CEI. ### Conclusion — summary findings and methodological notes - The EPI is a composite indicator combining data on inflation, unemployment, government deficit, and GDP growth into a single metric. - Construction characteristics: - Transparent and relatively simple. - Intended to be accessible for laypersons and applicable to any economy. - Validation evidence: - Historical review of U.S. data from 1790 to 2012 shows the EPI reflects major events (wars, booms, panics, recessions, depressions). - EPI captures official recessions over the past century and allows measurement and comparison of recession severity across eras. - EPI dynamics are similar to CFNAI and CEI despite EPI's relative simplicity. - Caveats and future work: - The index is methodological in nature; ongoing analysis is needed to extend applications. - Critics may view the EPI as "too simple" or argue it omits relevant variables; authors acknowledge these perspectives while emphasizing the EPI achieves its goal of providing an independent, meaningful, and simple evaluation of economic performance. *Source: _wp13214 - 92.7 B* ### Appendix A. Desired EPI Values. ### Appendix A. Desired EPI Values. ### Definitions — desired values used in the EPI - Desired inflation rate (I*) = 0.0%. - Desired unemployment rate (U*) = 4.75%. - Desired government deficit as a share of GDP (Def/GDP*) = 0.0%. - Desired change in GDP (ΔGDP*) = 4.75%. ### Desired inflation — rationale and evidence - Traditional Friedman-rule view implies optimal nominal interest rate = 0, which by inference implies optimal inflation would be negative; supported theoretically by Kimbrough (1986), Den Haan (1990), and Chari, Christiano and Kehoe (1993). - Cash-in-advance empirical work: Singleton (1985), Eckstein and Leiderman (1988), Hodrick, Kocherlakota and Lucas (1991). - Arguments for a small positive “grease” inflation due to downward nominal wage rigidity (Tobin, 1992). - Kim and Ruge-Murcia (2009) estimate optimal “grease” inflation for the U.S. ≈ 0.35% per year. - Estimates of optimal inflation vary by study and country: - Billi (2009): U.S. optimal inflation in the 0.7% to 1.4% range (depends on uncertainty). - Fuchi, Oda and Ugai (2008): Japan optimal inflation between 0.5% and 2.0% (depends on assumptions). - Practical decision for EPI: - Because theoretical negative-optimum results are not supported by recent research and numerical estimates are limited, the EPI sets desired inflation = 0.0% for all economies. - The methodology accounts for cross-country differences by calculating both a raw EPI score and a normalized EPI score. ### Desired unemployment rate — rationale and chosen value - Optimal employment has no formal single definition; empirical practice uses NRU/NAIRU which vary over time. - Historical NAIRU/NRU estimates cited: - Ball and Mankiw (2002): NAIRU for 1960-2000 varies from 5% to 6.5%. - Braun (1990): quarterly NRU rising from 5.5% in March 1953 to 7.4% in April 1979. - Weiner (1993): annual NRU rising from 5.1% in 1961 to 7.3% in 1979 then decline to 6.2% in 1993. - Gordon (1997): NRU declined from 6.2% in 1990 to 5.6% by mid-1996. - Murphy and Payne (2003): long-run U.S. averages 5.15%, 5.9% and 6.19% for 1965, 1980 and 1990 respectively. - Empirical distribution for U.S. unemployment 1890-2010: - Mean = 6.7%. - Median = 5.6%. - Unemployment rate ≤ 5% in 38% of observations. - Unemployment rate ≤ 4% in 21% of observations. - Conclusion and EPI choice: - Historical NRU estimates likely overstate achievable desired unemployment (data include depressions and policy mistakes). - For simplicity and comparability across time and countries, EPI uses a constant desired unemployment rate = 4.75% (consistent with the 34% quintile of the unemployment rates’ distribution). ### Desired government budget deficit as a share of GDP — rationale and chosen value - Balanced-budget notion: - A government that prudently manages spending and taxation will attempt to run a balanced budget over time. - Budget deficits can act as automatic stabilizers during business cycles; intertemporal budget constraint must hold (discounted expenditures and current debt compensated by future discounted tax revenues). - Barro (1979) ‘tax smoothing hypothesis’ suggests surpluses and deficits smooth taxes over time. - EPI choice: - Desired Government Budget Deficit as a share of GDP = 0.0% (balanced over budget cycles). ### Desired GDP growth rates — rationale and chosen value - Growth theory: - Long-run GDP growth driven largely by technological progress (Solow 1956, 1957); endogenous growth literature examines institutional, policy, education, technology, inequality and trade channels (Grossman and Helpman, Barro and Sala-i-Martin, Aghion and Howitt). - U.S. historical growth (1791-2010) statistics: - Mean growth rate = 3.7%. - Median growth rate = 3.7%. - Growth rate > 5% in 35% of observations. - Growth rate > 4.5% in 40% of observations. - EPI choice and implications: - Desired annual real GDP growth rate = 4.75% (in 38% of observations growth rates were even higher in the U.S.). - 4.75% annual growth will approximately double GDP every 15 years. - Assuming historical U.S. population growth rate = 1.2% per year continues, per capita wealth will double every twenty years. *Source: Appendix A. Desired EPI Values.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp13214.pdf_