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Friday, October 29, 2010

Real GDP Growth and the Unemployment Rate

by Calculated Risk on 10/29/2010 04:36:00 PM

Here is an excerpt from a previous post earlier this month and his probably worth repeating after the GDP report this morning. This relationship suggests the unemployment will rise with only 2% real GDP growth:

Real GDP and Unemployment Rate Click on graph for larger image.

Here is an update on a version of Okun's Law. This graph shows the annual change in real GDP (x-axis) vs. the annual change in the unemployment rate (y-axis).

Note: For this graph I used a rolling four quarter change - so all the data points are not independent. However - remember - this "law" is really just a guide.

The following table summarizes several scenarios over the next year (starting from the current 9.6% unemployment rate):

Real GDP GrowthUnemployment Rate in One Year

I expected a sluggish recovery in 2010, so I thought the unemployment rate would stay elevated throughout 2010 (that was correct).

Going forward, I think the recovery will stay sluggish and choppy for some time and I'd guess the unemployment rate will tick up in the short term and still be above 9% later next year. You can see why those expecting 1% to 2% growth next year (like Goldman Sachs) are expecting the unemployment rate to be close to 10%.

In general, the U.S. economy needs to grow faster than a 3% real rate to reduce the unemployment - and there is no evidence yet of a pickup in growth.