Poor Potential

The unemployment rate declines when an economy grows faster than its potential. This usually happens coming out of recessions when an economy makes up for economic growth that didn’t occur during the recession. The problem is, while the unemployment rate is falling nicely, it’s occurring with GDP growth of just 2.25%/year, suggesting that potential GDP is less than that! Before the recession, potential GDP growth was a robust 3%/year! Unnerving.