it looks above-trend to me...
I'm teaching my advanced students about "Real Business Cycles" this week, and, as part of the set up I'm introducing them to the Hodrick-Prescott (HP) filter, a widely-used method of separating "cyclical" from "trend" components of time series data, like US GDP. I recently updated my example - the red line is US real GDP, which tends upwards, with occasional interruption, and the blue line is the trend, according to HP filter:
The striking thing is at the end, where filter shows GDP above its trend path. This is clearer if we pull out the deviations:
So, we're "above trend"? Economy's not so bad after all?!
Well, not really... the way the HP filter works is that it chooses a trend that minimizes the distance between the trend and the underlying data, subject to a constraint limiting the change in the growth rate of the trend, which is what forces it to be smooth. The US economy's slump was deep and long enough that it pulled down the trend far enough that we're now a little above it.
Here is the growth rate of the trend:
I'm not sure whether this says more about the economy or the de-trending method (there's a whole literature on technical issues in de-trending...). But it does remind us that we need to be careful in how we use our tools and interpret their results (i.e., we should actually look at the graphs).
A somewhat different picture, which is more consistent with what most of us think is the state of "the economy" is given by comparing real GDP to the CBO's estimate of "potential output":