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For immediate release: September 27, 2007

Dallas Fed: Sources of GDP, Employment Volatility Have Shifted, but 'Great Moderation' Endures

DALLAS—The "Great Moderation" in economic volatility has continued into the new millennium, according to the September issue of the Federal Reserve Bank of Dallas' Economic Letter.

In "The 'Great Moderation' in Output and Employment Volatility: An Update," vice president and senior policy advisor Evan F. Koenig and economic analyst Nicole Ball find that the improved economic stability that began in the mid-1980s has continued into the new millennium.

In the case of GDP growth, the Great Moderation has meant that investment spending and household purchases of durable goods—such as cars, furniture and home appliances—are more stable than before.

While swings in business investment still account for more than half of short-term variation in GDP growth, "Changes in household spending on nondurable goods are now more important than movements in consumer durables," the authors write.

A smaller and less volatile manufacturing sector is almost entirely responsible for greater stability of jobs growth, according to the authors. Swings in manufacturing employment have dropped from half of all variation in economy-wide jobs growth to one-fourth. The expanded professional and business services sector is currently the biggest single contributor to short-run swings in job growth.

While better monetary policy may have played a role in reducing economic volatility, the authors suggest that other factors probably contributed as well, including improved inventory management, changes in the financial system and elimination of ceilings on bank-deposit interest rates.


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James Hoard
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