Third Quarter GDP Will Turn Positive, Finally!
by John B. Hagens
John has been with IPR since 1990, with activity in all of IPR's businesses. Prior to joining IPR, John was senior vice president for the WEFA Group, with responsibility for the company's U.S. economic forecasting service. Before his ten-year stint with Chase Econometrics (and then WEFA), John had jobs as senior economist for the Carter Administration's Council on Wage and Price Stability and for the Social Security Administration, the latter under a Brookings Institution Economic Policy Fellowship awarded while he was an economics professor at Colby College. John holds an undergraduate degree in mathematics and economics from Occidental College and a Ph.D. in economics from Cornell University.
Third Quarter U.S. GDP Will Turn Positive, Finally!
Today's October 2nd employment report from the U.S. Bureau of Labor Statistics covering September showed a small uptick in the unemployment rate (9.7% to 9.8%) and a larger than expected drop in payroll employment (-263,000 compared with an expected -160,000). This comes on the heels of Wednesday's GDP report from the Bureau of Economic Analysis covering the second quarter. Real GDP continued to decline in Q2, but at a much less severe -0.7% compared with the huge declines of more than 5% in the previous two quarters. The guessing game has begun about GDP growth in Q3, with most pundits expecting modest growth in the 2%-3% range. Using the statistical relationship between hours worked and GDP over the past several business cycles, positive Q3 GDP growth is likely. There are two factors at work. First, though still declining, the picture for total hours worked has significantly improved and is no longer in a free fall. Here a picture of the last four quarters:
Second, productivity (GDP/Hours) typically accelerates as a recession "ages", though the reasons for this pattern are not well understood. The last two severe recessions in 1973-75 and 1981-82 showed the following patterns for productivity as they came to an end:
Based on a statistical analysis of the time pattern of productivity for all recessions since 1970, +5% is a reasonable estimate of productivity growth for the third quarter of this year. Given today's employment report, we now know that q3 hours dropped 3%. Combining the two, third quarter GDP growth (productivity growth + hours growth) would be 2%. It thus appears likely that the "output corner" has been turned. In most previous recessions hours worked begins to grow soon after GDP turns. But note that as the economy "recovered" from the 2001 recession, total hours dropped in each of the first six recovery quarters! Let's hope recent history -- the jobless recovery of this decade -- doesn't repeat itself.