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Okun's Law Requires Growth below 2.5%, August 14, 2006
Summary: Many people take the economic showdown embodied in the 2.5% GDP growth rate reported in the second quarter as clear evidence that the economy has slowed to a noninflationary pace, as desired by the Fed. This judgment is not supported by the application of Okun's Law. Revisions to GDP, productivity and unit labor costs imply that potential growth is significantly lower than had been widely assumed. To prevent growth from pushing inflation higher, economic growth would need to fall to roughly 2% on a sustained basis. If growth remains above this level, as is widely expected, the Fed will need to resume hiking interest rates.
Many people take the economic showdown embodied in the 2.5% GDP growth rate reported in the second quarter as clear evidence that the economy has slowed to a noninflationary pace, as desired by the Fed. This judgment is not supported by the application of Okun's Law. Revisions to GDP, productivity and unit labor costs imply that potential growth is significantly lower than had been widely assumed. To prevent growth from pushing inflation higher, economic growth would need to fall to roughly 2% on a sustained basis. If growth remains above this level, as is widely expected, the Fed will need to resume hiking interest rates.
Okun's Law relates changes in GDP to changes in unemployment. In fact, this "law" is a rough statistical relationship, which can vary depending on productivity change and changes in the composition of the labor force. Still, it is a very useful way to gauge how...
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This section contains 363 words (approx. 2 pages at 300 words per page) |
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