On Friday, the Bureau of Economic Analysis announced that the GDP rose 5.7% from the third quarter to the fourth quarter of last year, exceeding expectations of 4.5% growth. Since job growth is generally a lagging economic indicator, this is good news for those seeking jobs. Historically, as GDP goes up, the unemployment rate goes down (not vice versa). OpenCRS, a website that makes Congressional reports available to everyone, released an excellent report last November titled Unemployment and Economic Recovery, prepared by Brian Cashell, explaining this relationship, known as Okun’s Law.
The CRS report has a graph of unemployment rate (plotted as the dependent variable) vs. economic growth rate (as the independent variable, usually measured as GDP) over the past 60 years.
According to the historical data, GDP growth of 5.7% correlates well with a decrease in the unemployment rate (approximately 0.5%). The current (December 2009), seasonally-adjusted unemployment rate is 10.0%, according to the Bureau of Labor and Statistics. As a side note, Google has a slick public data initiative that can pull and plot historical data made publicly available. Below is a graph of the percentage of the total workforce that is unemployed from 1990 – 2009 (not seasonally-adjusted). Click on the “Explore Data” link to view state-by-state data.
So will the next update from the Bureau of Labor and Statistics show the unemployment rate has fallen below 10.0%? Probably not. According to tweets from the writers of the 538 blog, some of this growth was due to one time government spending.
So if the real GDP growth for the 4th quarter of 2009 was 2.9%, then were probably still looking at a slight increase in the unemployment rate — the break even point is about 3.5%. However, it could mean that things are headed in the right direction. A few quarters of 4 – 4.5% growth could bring the unemployment rate down a full percentage point, which would at least start to feel like a recovery.
