U.S. Unemployment and GDP: Imperfectly Aligned

U.S. Unemployment and GDP: Imperfectly Aligned

August employment data and the revised GDP growth rate for Q2 show that GDP growth was higher, but the unemployment rate also rose slightly. Shouldn’t unemployment drop when economic growth increases? Not always.

U.S. economic growth continued to be solid in Q2 2017. In fact, GDP growth checked in at 3%, which was above the 2.7% rise that was expected. That 3% growth rate was the fastest the economy has grown in two years, and the momentum from the Q2 is expected to carry over into Q3.

Positive retail sales and business spending, and a somewhat limited predicted economic effect paired with anticipated growth from rebuilding after Hurricane Harvey, are all expected to be positives for the U.S. economy in Q3.

It is logical to think that the unemployment rate will continue to decline as the U.S. economy clocks in quarter after quarter of strength. However, that isn’t always the case. In fact, the unemployment rate crept slightly higher in August, from 4.3% to 4.4%.     

This Economic Recovery is Different

This pairing of unemployment and economic data may seem confusing, but it’s not as anomalous as it seems. The economy is still generating jobs, just not as fast a pace as previously this year.

U.S. policymakers consider “full employment” in the U.S. to be 5%. That’s the condition where, in theory, virtually everyone who is able and looking for employment has found it. This number is debated regularly, particularly given the levels of unemployment in certain economic sectors and demographic categories. But the overall trend for the joblessness rate in the U.S. is lower, and while the rate bobbed up a bit in August, it is still below that 5% threshold.

Other measures of employment in the economy remain stagnant. The unemployment measure known as U-6, which includes people stuck in part-time jobs that would like to move to full-time employment, stayed at 8.6% in August for the third consecutive month. While it is down more than a percentage point since last year, the lack of recent movement may contribute to the feeling that job growth is softening.

Wage growth also continues to be relatively modest. In August, it grew 0.1% since July, and was up 2.5% over the previous year. While low inflation has upped household purchasing power, it also has limited companies’ ability to raise wages. When firms cannot raise prices on the goods they sell, they also cannot pass the additional revenue from those price hikes along to workers in the form of raises.

What Does the Current Relationship between Unemployment and GDP Growth Mean for Investors?

The economic environment in the U.S. remains positive. Many economists are expecting this strength to continue in the near term given solid corporate earnings, relatively robust consumer and business spending, and other factors. The still-surging U.S. stock market also points to investor confidence in the economy’s soundness.

While the employment picture in this recovery has made gains in fits and starts, it has improved significantly overall. In any period of economic growth, the unemployment rate may not always move lower month-to-month. Just as the economy made fitful gains toward recovery since the Global Financial Crisis, unemployment is not on a straight-line path lower. So while the current relationship between unemployment and GDP appears to be opposite of what we’d expect, they’ve both been trending in the right direction.

Segal Marco Advisors will continue to watch these economic conditions as Q3 ends and we develop our next quarterly Investment Outlook.

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Tim Barron, CAIA

Tim Barron, CAIA
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Catherine Hickey
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