Unemployment and growth in the US

The chart shows the year-on-year percentage change in real (inflation-adjusted) US GDP compared with the 6 month change in the unemployment rate, inverted.  So, if the unemployment rate was 6% 6 months ago and is 4% now, that would show as +2%.  Why inverted?  Because when growth improves, unemployment falls; when the economy goes into recession, unemployment rises.  Unemployment is inversely related to the business cycle.

The relationship between these two indicators prior to 2011 is very good.  Since 2011, there is still a relationship but the red line (the change in unemployment, inverted) is higher relative to GDP than it used to be.  Which means unemployment has fallen faster in this recovery than you might have expected.   Put another way round, lower economic growth this cycle has nevertheless led to a bigger than normal fall in unemployment. Which in turn implies that productivity growth has been lower than it was historically.  Following from that, it suggests that the US long-term sustainable growth is lower, because sustainable growth equals long-term productivity growth multiplied by the growth in the labour force.

Why has productivity growth been lower this cycle?  Partly because experienced baby-boomers have been retiring and have been replaced by youngsters.  Partly because company investment in plant and equipment has been lower than in the past.  Soaring profits have been used to buy back shares, not to invest in new capacity.  Whatever the reason, it ought to be concerning the US government.  If there were any grownups left, that is.

(Click to enlarge)