Job growth has been relatively weak. Can GDP really be as strong as it looks?

Job growth has been weak compared to GDP growth in recent years, but does that disconnect suggest a hidden weakness in the GDP data?

Not according to historical data analyzed in a new Cleveland Fed report.

On the surface, the disconnect appears to violate Okun’s law, which suggests that unemployment and GDP should move in opposite directions.

But the report’s authors present two key findings “indicating that the overall economy is as strong as GDP data suggest.”

• Productivity gains are unlikely to be revised away. Those gains, which have boosted GDP, are more likely to be revised up slightly, given historical patterns, according to the authors, Dylan Jacobs and Pawel Krolikowski.
  • “Historical revisions to smoothed labor productivity growth are almost always positive,” the authors write.
• GDP affects unemployment data with a lag. A prediction model that incorporates a two-quarter lagged effect suggests that “the recent data are not unusual.”
  • For instance, the large gap between third quarter unemployment and GDP appears puzzling at first, but once first quarter GDP weakness is accounted for “this apparent violation of Okun’s law disappears.”

“Together, these findings suggest that the apparent tension in recent data may be less severe than it first appears. Contrary to the concern that either output or labor market data must move into line with the other, both robust GDP growth and a gradually rising unemployment rate are consistent with strong labor productivity growth and historical relationships,” the authors write.

Read the Economic Commentary: Reconciling Recent Strong Output Growth with Rising Unemployment