U.S. economic indicators don't add up.
The unemployment rate has plunged to 8.2 per cent from 9.8 per cent over the last couple of years. That's a big drop. Yet the economy is only growing at a moderate rate. Gross domestic product hasn't expanded at an annual rate faster than 3 per cent in seven quarters through the one that just ended in March.
Tom Porcelli, Royal Bank of Canada's chief U.S. economist in New York, says the unemployment rate is a "head fake." Based on the relationship between the unemployment rate and the real GDP growth rate between 1950 and 2008, the U.S. economy should be advancing at a rate of about 3.9 per cent. That's recovery velocity, and the U.S. economy managed that pace for a few quarters in 2009 and 2010. But it didn't hold. The link between the unemployment rate and GDP apparently is broken.
Considerable academic energy is being used to try to understand why the unemployment rate and GDP appear to be telling different stories.
Federal Reserve chairman Ben Bernanke, for example, suggests that the rapid drop in the unemployment rate reflects a similar outsized surge in the jobless rate at the start of the recession. He's of the view that the unemployment rate could level off around 8 per cent.
That's still high by historical standards and is the biggest reason the Fed is set to leave its benchmark interest rate near zero until the end of 2014.
While the search of an explanation continues, Mr. Porcelli is turning to another measure of the labour market to guide his thinking on the state of the economy. He says the employment-to-population ratio better reflects what is going on in the overall economy.
One of the reasons the unemployment rate has fallen so much is an exodus of people from the work force. The participation rate of workers aged 20-24 has declined to 71 per cent from closer to 75 per cent a few years ago; the participation rate of those aged 25-34 has dropped to 82 per cent from 84 per cent in 2008. For Mr. Porcelli, this why the unemployment rate can't be trusted as a barometer of economic health. It has declined for the wrong reasons.
So when the Labour Department releases its next jobs survey on Friday, the Royal Bank economics team will be watching the employment-to-population ratio. Based on that numbers relationship to GDP over the 1950-2008 period, the U.S. economy should have grown at an annual rate of 2.2 per cent over the past couple of years. The actual result, according to Commerce Department figures: 2.3 per cent.