Economy and Jobs Watch: More Weakness in GDP and Employment

Output data shows some sign of life, but the labor market continues to be weak.

Output data shows some sign of life, but the labor market continues to be weak.

Gross Domestic Product

Real gross domestic product (GDP) grew at a 2.4 percent annual rate in the second quarter of 2003 according to the Bureau of Economic Analysis. While this was the best rate of growth since the third quarter a year ago and better than projections, the economy is still below the 10-year average of 3.2 percent (see graph below). Unfortunately, if you remove national defense spending, the economy only grew at a 0.7 percent rate.

These numbers show that while the economy is seeing some growth, considerable weakness is still present. Furthermore, a growth rate of 2.4 percent is still not high enough to have a significant impact on the weak labor market.

The relation between the labor market and output growth is sometimes described using Okun’s law – named after economist Author Okun and first formulated in the 1960’s. The rule, which fit the data rather well over the past 40 years, says that it takes a GDP growth rate somewhere between 3 and 3.5 percent to keep the unemployment rate from rising. (Okun’s original formulation suggested 3 percent, more recent estimates suggest it might be slightly higher.)

Unless the growth rate of the economy picks up substantially, the weak labor market will likely continue.

On August 1, President Bush remarked “... even though some of the numbers are good, there are still too many people looking for work, and so we're going to keep working on the economy until people can find a job.” He then left for the start of his 35-day August vacation at his Crawford, Texas ranch.

David Letterman’s comment: "See what you think of this. President Bush is leaving to go to Crawford, Texas for a 35-day working vacation. This should go over big with all the people taking a 'can't get work' vacation."

Unemployment

The unemployment rate fell to 6.2 percent in July from 6.4 percent the previous month according to the Bureau of Labor Statistics. This good news, however, is tempered by the continuing decline in labor force participation – in July over half a million people left the labor force.

In addition, employment continued to decline with an additional 44,000 jobs lost in July. Since March 2001, which was the start of the recession, employment has declined by 2.7 million and private sector employment has declined by 3.2 million.

Since the end of the recession (and the start of the current expansion) in November 2001, employment has declined by just over one million. As the Economic Policy Institute points out, “this the weakest recovery in terms of employment since the BLS began tracking monthly data in 1939.”

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