We construct new estimates of potential output and the output gap using a multivariate approach that allows for an explicit role for measurement errors in the decomposition of real output. Because we include data on hours, output, employment, and the labor force, we are able to decompose our estimate of potential output into separate trends in labor productivity, labor-force participation, weekly hours, and the NAIRU. We find that labor-market variables-especially the unemployment rate-are the

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... ost informative individual indicators of the state of the business cycle. Conditional on including these measures, inflation is also very informative. Among measures of output, we find that although they add little to the identification for the cycle, the income-side measures of output are about as informative as the traditional product-side measures about the level of structural productivity and potential output. We also find that the output gap resulting from the recent financial crisis was very large, reaching -7 percent of output in the second half of 2009. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors. We are grateful to Candace Adelberg and Dane Vrabac for able research assistance, and to Bruce Fallick, Mike Kiley, David Lebow, Dan Sichel and Thomas Trimbur for helpful comments and suggestions. Earlier drafts of this paper were distributed with the title, "A Multivariate Estimate of Trends and Cycles."