The one thing we seem to argue a lot about here is the state of the economy and whether a recovery is forthcoming. I am firmly in the camp that the technical recession is in fact over and think we will see a 3% print on Q3 GDP, but I also believe we are not out of the woods yet and may see a double dip recession (or skirt one) in 2010 with GDP growth coming in for the year in the 0-2% range. However, since my predictions carry zero weight and really matter little, I want to take this time to examine when we can look forward to real job growth in the economy and a sustained decrease in the unemployment rate.
The easy answer to when we will see sustained job growth is when we see sustained GDP growth, as the graph below shows the two are very closely correlated:
We can see that while job growth on the way down seems to follow almost is lock step with a GDP contraction, on the way back up it lags in intensity. This graphically shows us why unemployment is considered a lagging indicator, as not only does it turn after GDP (however slightly until 1990-1 and 2000-2), but it also takes longer to reach the pre-recession high than GDP does.
A great example of this is the 1981-82 recession, where we hit a peak employment of 91,594,000 in July of 1981 and didn't return to that level of total employment (while the overall population was increasing) until November of 1983. During that same stretch GDP went from its' peak in July of 1981 to a new high in Q1 of 1983 and by the time employment got back to its' pre-recession high in November, GDP was already up 7% above its' old high.
What all this means is that we need to closely watch GDP in the coming quarters to determine how robust the jobs recovery will be. Our high jobs mark was 138,152,000 in December of 07 and we now stand at 131,223,000. We are now 5% below the peak and would need a 5.25% increase in payrolls just to get us back to where we were prior to the recession. Based on past data (and the under performance of job growth to GDP growth), we will need GDP to grow by around 7-7.5% in aggregate in order to achieve the old levels of jobs.