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Job Growth Mismatched With GDP Growth, Could Slow in Coming Months

Jon Hilsenrath takes note of an unique dichotomy in the current economic data. Job growth has picked up, averaging around 250,000 over the last three months. However, GDP growth for the first quarter of 2012, based on various economic indicators, looks to be coming in at 2% or less, which does not typically correlate with major job growth.

Many economists in the past few weeks have again reduced their estimates of growth. The economy by many estimates is on track to grow at an annual rate of less than 2% in the first three months of 2012. The economy expanded just 1.7% last year. And since the final months of 2009, when unemployment peaked, the economy has expanded at a pretty paltry 2.5% annual rate.

How can an economy that is growing so slowly produce such big declines in unemployment?

This is seen as a violation of “Okun’s Law,” named for the Yale economist Arthur Okun, who set the relationship through statistical modeling between GDP growth and the unemployment rate. Today’s job growth would fit a 4-5% GDP growth in his model. But the current state of affairs does not appear to be tracking this. Why?

It could be that GDP data is just wrong, and will get reassessed upwards. That’s the optimistic scenario. Or it could be due to slower productivity growth, meaning that businesses must hire more workers to perform the same amount of tasks. Christina Romer believes that businesses “overfired” during the low points of the economy, and are now compensating by hiring to satisfy current demand (this may partly explain her prediction back in 2009 that unemployment would top out around 8%, also based on Okun’s Law and GDP projections at the time). Jared Bernstein says that trend growth is actually around 1-2% now, not 2.5%, and so Okun’s Law is actually working.

These opinions may explain the discrepancy, but they also portend bad signs for the economy going forward. Because with either explanation, it would mean that job growth will soon stall out, either as businesses finish rebalancing to meet demand, or as the labor force returns to normal growth. Here’s Bernstein:

If the labor force continues to pick up—you can clearly see a new trend developing at the end of the first figure—and productivity climbs off the floor—I don’t believe we’re a lot less productive than was recently the case–I expect less progress against unemployment. Like I said, my forecast is that by the end of the year, we’re around where we are now.

David Leonhardt made the same prediction over the weekend.

I think this is why you’re seeing so much activity with new housing market programs. Housing is the area where you could actually generate more economic activity without the input of Congress. But the constraints of protecting bank balance sheets cut against the work that would need to be done to alleviate the housing market. Democratic lawmakers are calling for the head of Ed DeMarco (perhaps for good reason), so Fannie and Freddie can be used as tools of social policy, and that ties into this as well. Action from Ben Bernanke and the Federal Reserve, which could sacrifice higher inflation for faster job growth, would be crucial as well. Bernanke at least has an inkling about the prospects for job growth ahead:

Fed Chairman Ben Bernanke hinted, in testimony to Congress last month, that he’s also worried that job growth could stall out.”Continued improvement in the job market is likely to require stronger growth in final demand and production,” he told lawmakers. But he is in no rush to provide more stimulus. The Fed meets for its next policy meeting Tuesday, and Mr. Bernanke has signaled that the central bank is unlikely to take new actions at the meeting while the Fed assesses how the economic outlook is changing.

The relatively good jobs numbers of recent months could send the Fed back into its shell, meaning they won’t get out in front of the imminent slowdown. This obviously has implications for the election, especially with the downside risk of high gas prices looming in the background. But the bigger problem is for the millions of Americans who want to work and cannot find anything.

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David Dayen

David Dayen