The Role of Resource Reallocation in Predicting Macroeconomic Indicators

We examine whether dispersion in cost stickiness is fully incorporated in estimates of gross domestic product (GDP). The sectoral shift hypothesis argues that when layoffs occur in certain sectors, it can take time for employees to find new jobs (presumably in a different sector), leading to labor reallocation frictions that lower GDP in the interim. Cost stickiness captures managerial resource decisions relative to the direction of sales changes, and therefore, when aggregate dispersion in cost stickiness is higher, firms/sectors are making different resource adjustment decisions, and extrapolating the sectoral shift hypothesis, we predict that these resource reallocation frictions lead to lower GDP. We find that dispersion in cost stickiness is associated with lower actual GDP and downward restatements of GDP, suggesting that the original GDP estimates do not fully incorporate this information. Since GDP estimates have widespread influence on decision‐making by government, businesses, and investors, information that can improve the accuracy is important.