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?
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