The U.S. economy doesn’t like to hover. If it isn’t expanding at a 2 percent or higher annual pace, it risks slipping into recession. As I mentioned in a post last week:
Research from the Federal Reserve finds that that since 1947, when two-quarter annualized real GDP growth falls below 2 percent, recession follows within a year 48 percent of the time. (And when year-over-year real GDP growth falls below 2 percent, recession follows within a year 70 percent of the time.
But rising unemployment can also be a warning signal. Goldman Sachs, for instance, has a “three-tenths rule of thumb” for the unemployment rate:
Technically, the “rule” is as follows: if the three-month average of the unrounded unemployment rate increases by more than three-tenths of a percentage point (35 basis points to be exact) from a trough, the economy has either entered recession already, or will do so within six months. The intuition behind this statistical regularity is that if the labor market stalls for more than a short period, a vicious cycle of weaker income growth, weaker spending and weaker hiring typically results. An important exception is in the early phase of economic recovery, when the unemployment rate often continues to drift higher for several months.
Currently, the three-month average rate is 9.07%, up from a recent trough of 8.90% in April. The unemployment rate would need to increase to 9.3% in July and stay there in August to trip the 35-basis point threshold; our forecast for Friday’s July labor market report is that the unemployment rate will remain steady at 9.2%.
So all eyes on Friday’s jobs report. Certainly some forecasters think the economy will be considerably stronger in the second half of this year. But from a political perspective, the 2012 economic landscape looks like it will be nowhere near what Team Obama was expecting or hoping for: 4 percent GDP growth and sub-8 percent unemployment