The study shows that in a model of the economy, when productivity drops, output falls faster and investment needs to be reduced more. This leads to countercyclical consumption growth and predictable equity risk premia. The model suggests that during transitions to lower productivity, consumption absorbs more of the output decline. The output gap, a measure of recessions, is positively correlated with future stock returns. The study finds that the output gap is a strong predictor of future stock returns over short and long periods, outperforming other variables.