GDP grows. But how long until full employment?

at 09:53 AM ET, 10/27/2011

The economy grew at a 2.5 percent annualized pace in the third quarter of 2011, according to new Commerce Department data released this morning. Seeing as how plenty of economists were grumbling about a double-dip recession not too long ago, even modest growth counts as cheering news. But 2.5 percent growth won’t bring us back to full employment anytime soon. So how much growth do we actually need?

Short answer: A lot more. Back in August, the Congressional Budget Office released its revised GDP forecasts and predicted that the economy would gallop along with 3.6 percent growth between 2013 and 2016. Now, as Jeffrey Frankel has shown, government forecasters tend to err on the optimistic side, but even in the CBO’s sunny scenario, we wouldn’t hit full employment until 2017.

And what happens if we grow at a more sluggish rate than the CBO expects, which is hardly implausible? Dave Altig, senior vice president and research director at the Atlanta Fed, recently drew up a chart of three growth scenarios, looking at how long it would take real GDP (what the economy is actually producing) to catch up with potential GDP (what the economy could be producing, given existing resources) under each:

If the U.S. economy starts growing at a healthy 3 percent annual pace, we’ll close the output gap by 2020. If, instead, the economy just chugs along at 2.5 percent growth rate we saw this past quarter, then the U.S. will stay below its potential for a long, long time (and unemployment, in all likelihood, will stay high). So while today’s GDP news is heartening, the economy needs a considerably bigger jolt to get us back to full employment. As NBER economist Justin Wolfers puts it, “There’s just nothing to say about 2.5 percent growth, beyond: The recovery has been postponed another quarter.”

 
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