Sovereign Debt, Gold and Okun’s Law
By Richard Mills
Despite what can only be described as a very weak economic recovery the US unemployment rate dropped, from nine percent to 8.3 percent this quarter. Yet Okun's Law holds that an economy, it's GDP, must grow above its potential to reduce the unemployment rate.
Okun's Law says that year-on-year economic growth of two percent above the trend (considered to be 2.5 percent) is needed to lower unemployment by one point. Many are forecasting real GDP growth of less than two percent for this quarter, not 4.5 percent, yet the unemployment rate is falling.
The apparent failure of Okun's law could be caused by faulty growth estimates and misleading unemployment figures.
"While it is true that growth was stronger in the fourth quarter, most of that growth was due to inventory accumulation...To begin with, the economic data looked brighter at this point in 2010 and again in 2011, only to fade as we got into the second and third quarters of those years...
Although the sharp decline in the unemployment from 9 percent last September to 8.3 percent in February suggests we are doing better than that, it is important to recognize that about half of that decline was due to a declining labor force participation rate. In fact, had the labor force participation rate not declined from around 66 percent in mid-2008 to under 64 percent in February, the unemployment rate would still be over 10 percent." William Dudley, President New York Federal Reserve
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