Unexpectedly Intriguing!
October 8, 2010

Now that we have a tool that relates the rate of economic growth to changes in the unemployment rate in the U.S., we can use today's employment situation report to back out roughly how much GDP grew in the third quarter of 2010!

GDP and Unemployment Rate Data
Input Data Values
Today's Year-Over-Year GDP Growth Rate [%]
One-Year Ago's Quarterly Unemployment Rate [%]

Change in Unemployment Rate
Calculated Results Values
Year over Year Change in Unemployment Rate [%]
Expected Level of Today's Unemployment Rate [%]

To do that, we first entered the 9.7% unemployment rate that applied in the third quarter of 2009 into our tool, then beginning with our default GDP growth rate of 2.5%, we systematically adjusted that figure until we matched the 9.6% unemployment rate that applies for the third quarter of 2010 in the tool's results.

That corresponds to an actual year-over-year growth rate of 3.2% for inflation-adjusted GDP. Since the GDP figure for the third quarter of 2009 was $12,860.8 billion (in terms of constant 2005 U.S. dollars), that would place real GDP for 2010Q3 at $13,272.3 billion, provided that our relationship between GDP and the unemployment rate holds.

We'll note that figure falls very close to the $13,284.3 billion target value we officially forecast earlier this week, and well within the $13,019 billion to $13,550 billion range that defines the lower and upper limits of our full forecast range for GDP in 2010Q3. We had given nearly 70% odds that GDP would be recorded to be between $13,144.8 billion to $13,423.8 billion, so we would expect to be very much on track when GDP for 2010Q3 is first reported toward the end of this month and finalized in December 2010.

But that 3.2% year over year real growth rate for GDP is not the growth rate that will be reported by the Bureau of Economic Analysis later this month. The BEA will actually report an annualized quarterly growth rate for GDP, based upon how much GDP changed from the second quarter of 2010 to the third quarter of 2010.

One-Quarter GDP Growth Rate Temperature Gauge, 2010Q2 Final Estimate We then find the annualized compounded growth rate of GDP from the second quarter of 2010 ($13,194.9 billion) to the third quarter of 2010 (which the unemployment data would place around $13,272.3 billion) to be about 2.4%.

That would place the one-quarter GDP growth rate for 2010Q3 in the "blue zone" of our GDP temperature gauge, which indicates slow economic growth when displayed against the backdrop of the typical economic growth has seen since the 1980s. Our temperature gauge chart here shows the one quarter GDP growth rate through the second quarter of 2010 for reference.

We therefore anticipate that the last GDP data that will be reported before the 2 November 2010 national election in the United States will very likely indicate continuing sluggish economic growth.

Looking forward, if the GDP figure is finalized at the level that today's employment situation report would suggest, the fourth quarter of 2010 would slow from 2.4% to 2.0%, going by our modified limo forecasting technique, which would indicate that the employment situation in the U.S. is unlikely to meaningfully improve through the end of the year.

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