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Is the US Economy Recession Ending?

Is the US Economy Recession Ending?

In economics, the "gap version" of Okun's law recognizes that a few percentage points rise in the unemployment rate will be associated with a two percentage point fall below the potential of real GDP growth rate.

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The gap is significant because the closer the economy is to its potential, the more worrying there can be about inflation.

The U.S. unemployment rate was 5.9 percent in June, compared to 3.5 percent before the outbreak, according to statistics from the Bureau of Labor Statistics. If we consider the second figure as an estimate of the unemployment rate, it could be a figure of 4.8 percent. Given that potential output is growing at 2 percent annually, non-inflationary real GDP growth will correspond to 6.8 percent for the next year. The U.S. Federal Reserve expects growth of 7 percent this year and 3.3 percent in 2022, and that could be ahead of the U.S. inflation by at least a few years.

This estimate of the output gap can be spoken of as low or high. The very low, official unemployment figures - 9.5 million in June 2021 compared to 5.7 million in February 2020 - are considered an underestimate in the labor market. The BLS says in June that "the number of people currently not in the workforce seeking employment is 6.4 million" and maybe up "1.4 million since February 2020"

Considering the challenges of the COVID-19 process, there could be a massive workforce mismatch. The nature of the work has varied considerably as a result of the lockdowns and other interventions. Sometimes working from home may not be as efficient as working in a factory or other location outside the home.

As there may be pandemic-driven pressure on automation, the effects on labor markets may not be a reliable numerical estimate. The best estimate is that a 2-4 percentage point decrease in the output gap, could increase the natural unemployment rate by one or two percentage points.

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Finally, it is also important whether financial incentives reduce the efficient labor supply. In addition to the unemployment support, which will expire in September 2021, various cash support benefits, especially additional child benefits, were also provided.

These will support many workers to have a choice in employment by expanding budgetary constraints. This also means the possibility of a positive labor supply shock in September. While reliable estimates of the "labor-return" effect are lacking, the best estimate is that the natural unemployment rate will fall by 0.5 percentage points and the output gap will rise by one point.

Disregarding the three "loose" changes described above, the tentative estimate of the output gap after September 2021 is between 1.8 percent and 3.8 percent. This means room for a non-inflationary 3.8-5.8 percent development for the coming years.

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