Population Growth & Productivity Headed In Wrong Direction by Gary D. Halbert
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
August 18, 2015
IN THIS ISSUE:
- 3Q GDP Report May be a Stunner on the Downside
- Population Growth & Productivity Headed in Wrong Direction
- Population & Productivity Growth Drive the Economy Long-run
- Worker Productivity Has Plunged Lower Since 2010
- What Can be Done to Boost Sustained US Economic Growth?
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Today we’ll focus on some longer-term economic data which shows, unfortunately, that the US economy is in a multi-decade slide that will be very difficult to reverse. Population growth and worker productivity – the keys to sustained economic growth – are both in decline, trends that are not likely to change anytime soon.
US Gross Domestic Product averaged 3.74% annual growth from 1950 to 1990, but has since slowed dramatically to average only 2.21% from 2010 to 2014. Even worse, worker productivity that averaged 2.5% annual growth from 1948 to 2007 has been slashed by over 50% to only 1.2% annually from 2010 to 2014.
Throughout its history, the US has been a productivity powerhouse. US worker productivity growth averaged around 3% annually during the period 1996-2004, but fell to 1.5% in 2005-2012, and more recently has slipped even further to just above 1%.
What’s at stake is the very future of America. Without faster growth, the US can’t create enough jobs for those who want them, and Americans will have to get used to much smaller increases in their paychecks. The middle class will likely shrink even more, and the poor would be even worse off. Are we doomed to a dimmer future?
The question is, what can be done to reverse these troubling trends? The answers are not simple, nor politically correct in most cases. Another question is, do any of the politicians running today have the knowledge and/or conviction to tackle these critical problems?
That’s what we will talk about today. But before we get to that discussion, let’s look at the Fed’s latest prediction for the economy in the 3Q. The latest GDPNow forecast will surprise you.
3Q GDP Report May be a Stunner on the Downside
At the end of July, the Commerce Department reported that 2Q GDP rebounded to 2.3% (annual rate), up from a revised 0.6% in the 1Q. Since then, other reports (mainly rising inventories) have suggested that the 2.3% initial estimate will be revised up to about 2.9% at the end of this month. That will come as welcome news, assuming it happens.
Now let’s shift our focus to the 3Q which doesn’t end until September 30. In the first half of this year, most forecasters expected a GDP bounce to 3.0% or better in the 3Q and the 4Q. While the consensus has dipped since late last month, the average forecast for 3Q GDP now stands at 2.7%.
Yet the Federal Reserve Bank of Atlanta does not agree with that forecast, at least not yet. As you can see below, the Atlanta Fed is forecasting GDP growth of only 0.7% in the 3Q, down from 1% at the beginning of this month. That would be a stunner if it remains at that anemic level.
Earlier this year, the Atlanta Fed devised a new method of measuring GDP, called GDPNow, that updates weekly. Because this method is relatively new, we don’t yet know just how accurate it is. However, its estimate for the 2Q was 2.4%, which was very close to the 2.3% figure put out by the Commerce Department at the end of last month.
If 3Q growth comes in below 1%, that will result in a whole different narrative on the US economy. Talk of a robust recovery in the second half of the year will go down the drain, and the discussion will turn instead to recession.
Some Fed watchers suggest that the Atlanta Fed is still tweaking its GDPNow inputs, and the number should come more in line with the consensus as we approach the end of the quarter. I have no idea if that is true or not. We’ll have to see.
This, of course, has intensified the speculation on whether or not the FOMC will hike the Fed Funds rate for the first time in a decade at its September 16-17 policy meeting. If the 3Q GDPNow forecast is still below 1% in September, I don’t see how the FOMC can start “liftoff.”
Population Growth & Productivity Headed in Wrong Direction
On its current trajectory, the US faces a dimmer future if major changes are not implemented soon. Millions of Americans who want a full-time job still can’t find one. Millions more are working part-time for this same reason.
Worker paychecks are barely keeping ahead of inflation. Worker productivity has plunged to less than half its historical average, just since 2007. Meanwhile, governments at all levels are struggling to prevent future costs from spiraling out of control.
The reason for these problems is straightforward: slow and falling economic growth.
Since the turn of the century, economic growth has slowed significantly under both a Republican and a Democrat president. Meanwhile our debt continues to pile up. No one seems to know how to right the ship.
The economy has been growing at a 2% pace since the recovery began in mid-2009, but GDP is expanding well below its historic growth rate of 3.3%. And it hasn’t topped the 3% mark annually in a decade – the longest barren stretch in modern times.
The current crop of politicians running for the White House understands that we need more jobs and a stronger economy. Yet they disagree widely on what needs to be done to make it happen. Republican Jeb Bush recently said his goal as president would be to get the economy back to 4% annual growth. Good luck with that!
Most respected economists say that 4% GDP growth is now an impossible dream. Many are doubtful that the US can regularly achieve 3% growth again. Among the minority who believe we can still get to sustained 3+% growth, there is broad disagreement on what needs to done to get there.
What’s at stake is the very future of America. Without faster growth, the US can’t create enough jobs for those who want them, and Americans will have to get used to much smaller increases in their paychecks. The middle class will likely shrink even more, and the poor would be even worse off.
Government at all levels – federal, state and local – will be adversely affected if growth remains at the current pace, and much more if the trend continues lower as appears likely. They’ll find it harder to balance budgets, pay bills, maintain entitlement spending and make badly needed investments in roads, bridges, research and other endeavors critical to the economy.
Even maintaining the world’s most powerful military could be jeopardized.
Population & Productivity Growth Drive the Economy Long-run
How fast the economy grows over long periods is determined by two main factors: population growth and worker productivity. Unfortunately, both have been slowing significantly since the turn of the century.
The slowdown in population growth is the easier factor to understand. In short, we’re getting older. Baby Boomers are retiring in increasing numbers, birth rates have fallen and the weaker US economy has actually caused many immigrants to leave the country.
The US population increased less than 1% in 2014, the smallest gain since World War II and just half the rate compared to the early 1990s, according to the Census Bureau. This trend looks even worse for the working-age population.
Given our aging demographics, the easiest way to increase the population is to let in more immigrants, but this issue has become a lightning rod in Washington that’s resulted in a political stalemate. It’s a lot harder politically, in any country, to get a push for more immigration when you have a large number of citizens who are unemployed or underemployed.
Despite that, the Census Bureau reported last week that the number of immigrants now living in the US (legal and illegal) is at an all-time record high of 42.1 million, up 1.7 million in the last year alone.
Another option is to increase the percentage of able-bodied people 16 or older who are in the workforce. But as I point out often, the Labor Force Participation Rate has been falling since the turn of the century, and it recently touched a 38-year low of 62.6%. This decline won’t be easy to reverse. In fact, it may never be fully reversed.
So much for the population side of this dilemma. Now let’s look at the productivity side. Since 2009 and 2010, worker productivity has fallen off a cliff. There are several theories on why this has happened, but there’s no one definitive answer.
Worker Productivity Has Plunged Lower Since 2010
Productivity is defined as how much an employee produces in an hour of work – how many widgits are made, how many restaurant customers are served, how many auto parts are made, how much software code is written, etc., etc.
US worker productivity is today advancing at one of its worst rates on record, frustrating prospects for a sustained economic acceleration more than six years into the recovery.
The productivity of nonfarm business workers, or the output of goods and services per hour worked, increased only at a 1.3% annual rate in the 2Q, the Labor Department reported last week. That gain followed two consecutive quarterly declines. From a year earlier, productivity was up just 0.3%.
After surging in the early days of the economic recovery, worker productivity has slowed to a pace last consistently recorded in the early 1980s. As a result, businesses need to add employees to meet demand rather than extract more from their existing workforce.
[Editor’s Note: This chart shows the productivity rate of growth since 1980, which is lower than the earlier U.S. annual economic growth chart showing the productivity rate since 1948. Not surprising.]
The payoff from higher productivity is huge. It means businesses earn greater profits and companies can afford to pay workers more without increasing costs. It means firms have a bigger advantage and more staying power over less productive rivals.
The weak productivity highlights numerous reasons why this economic expansion is so weak. For one, more companies are now consistently hiring, but are keeping a lid on wage increases and limiting their overall investment. The consequence: The economy can’t break out of its slow-growth cycle.
Throughout its history, the US has been a productivity powerhouse. As noted above, the amount of goods and services produced by American workers increased by a healthy average of 2.5% a year since 1948. It even grew by a whopping 3.3% annually from 1998 to 2005. Yet productivity began to slow about a decade ago and it’s grown by a meager 0.3% in the last 12 months as of the end of June.
Many companies have shifted research and development overseas, while others are investing less aggressively in the United States. The rate of investment in software, computers and similar technology, for example, has nosedived over the past decade.
The number of new companies started each year in the US has fallen dramatically since the late 1980s, depriving the economy of a critical source of productivity-boosting innovation. In fact, the number of businesses closing down in the US now is greater than the number of startups for the first time since the Great Depression.
What Can be Done to Boost Sustained US Economic Growth?
Economists and business leaders say a major overhaul of the corporate tax code that simplifies and reduces rates would make American companies more competitive and encourage foreign firms to set up shop in the United States.
Others call for more scrutiny of regulations to weed out unnecessary, outdated and/or counterproductive laws that discourage new businesses from forming or drive them out of the country.
I say we need to do both – radically overhaul the tax code, both for corporations and individuals, and reduce onerous regulations. This is why the 2016 presidential election is so critical. I’m not sure that any of the GOP candidates have the answers or the backbone to fight for them if they do.
But what I am sure of is that if we elect another liberal Democrat for a de facto third term of Obama, things will continue to get worse. And we’re rapidly running out of time to change direction in this country before it’s too late.
I could go on and on (and on), but I’ll leave it there for today.
Gary D. Halbert