« links for 2010-09-27 | Main | Alternative Definitions of the Business Cycle »

Tuesday, September 28, 2010

More Bad News about Unemployment

Unemployment could continue rising through the first half of 2011:

Forecasting Growth over the Next Year with a Business Cycle Index, by David Lang and Kevin J. Lansing, FRBSF Economic Letter: The current economic recovery is proceeding at a tepid pace despite massive federal fiscal stimulus and extremely low interest rates. Forecasts derived from business cycle indicators produced by the Chicago and Philadelphia Federal Reserve Banks predict that real U.S. GDP growth through the first half of 2011 will remain at or below potential. If these forecasts prove accurate, then the historical relationship between real GDP growth and the labor market suggests that the unemployment rate could rise by as much as 0.5 percentage point during this period.
The National Bureau of Economic Research Business Cycle Dating Committee has determined that the recent recession ended in June 2009. Since then, the U.S. economy has recorded four consecutive quarters of positive real GDP growth. During this period, inventory accumulation by businesses accounted for more than half the growth, while real final sales of domestically produced goods and services grew only at an annual 1.1% rate on average. Due to the severity of the recession and the lackluster nature of the recovery so far, the level of real GDP at the end of the second quarter of 2010 was still 1.3% below the pre-recession peak reached more than 2½ years ago.
Recent weaker-than-expected economic data have raised concerns about the recovery’s staying power. In a recent Economic Letter, Berge and Jorda (2010) estimate the probability of falling back into recession during the next two years at around 50%. While discussions in the media often focus on the likelihood of a “double dip,” it is important to recognize that, even if the economy avoids another recession, future real GDP growth may not be strong enough to prevent the unemployment rate from rising. Standard macroeconomic models would predict an increase in the unemployment rate if real GDP growth over the next two to four quarters were to fall below the economy’s potential growth rate, defined as the sum of the long-run trend growth rates of productivity and the labor force. The Congressional Budget Office (CBO 2010) estimates that the U.S. economy’s potential annual growth rate over the next five years is 2.1%. Other estimates of potential growth are significantly higher. If real GDP growth were to fall below potential growth for a sustained period, then the unemployment rate would be expected to rise.
In this Economic Letter, we use two well-known business cycle indicators to help forecast real GDP growth two to four quarters ahead. According to our empirical forecasting models, real GDP growth will remain at or below estimates of potential growth through the first half of 2011, implying a significant risk of rising unemployment. ...[...continue...]...

One of the points I try to make in the post above this one is that a focus on alternatives to the NBER measure of the business cycle that give employment more weight could improve the policy response to unemployment problems.

    Posted by on Tuesday, September 28, 2010 at 12:42 AM in Economics, Unemployment | Permalink  Comments (19)


    Feed You can follow this conversation by subscribing to the comment feed for this post.