With lower than potential growth, US unemployment could move to 10.1%

San Fransisco Fed research continues to show concerns for US economy. In previous paper they said it looks like there will be a jobless recovery. The reason was high productivity which is expected to remain.

Now in another research note, David Lang and Kevin J. Lansing forecast US growth and unemployment. They use the business cycle indicators produced by the Chicago and Philadelphia Federal Reserve Banks to predict growth for 2011 and H1 2012. And then use Okun law relationship to predict unemployment.

The analysis shows:

Figure 3 plots forecasts from the two-quarter-ahead models versus the two-quarter moving average of real GDP growth from 2007 to 2010. Both forecasts track the actual data fairly well through the first half of 2010, but with a lag, which is typical when current and past data are used to make predictions about the future. For the second half of 2010, the CFNAI model predicts an average growth rate of 1.0%, while the ADS model predicts an average growth rate of 1.9%. The four-quarter-ahead CFNAI model predicts average growth rates through the first half of 2011 of 1.6% and the four-quarter-ahead ADS model predicts 2.2%. By contrast, the most-recent Blue Chip consensus forecast is for 2% growth in the second half of 2010 and 2.3% through the first half of 2011.

Averaging the four-quarter-ahead CFNAI and ADS models produces a growth forecast of 1.9% through the second quarter of 2011. If this growth forecast proves accurate, then the historical Okun’s law relationship would predict a corresponding 0.5 percentage point rise in the unemployment rate over the next year, from the current 9.6% to 10.1%. Such a scenario would take the unemployment rate back to the peak recorded in October 2009. If instead we use the 2.3% Blue Chip consensus growth forecast, then Okun’s law predicts a smaller rise of approximately 0.35 percentage point in the unemployment rate.

This is the last thing Obama and team would want. With mid-term polls in November and if unemployment numbers move up, there could be lot of problems in political front.

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