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Why America needs to get used to slower growth

Most economic writing focuses on the cycle: Is growth speeding up or slowing down? Is there going to be a recession? But over any longer time period, what really matters for standards of living is how quickly the nation's economic potential is rising -- whether we are finding ways to make more stuff.

By that measure, the future doesn't look too bright, according to a new report from economists at JPMorgan Chase. The future isn't what it used to be, write Michael Feroli and Robert E. Mellman; they see long-term growth potential for the United States falling to 1.75 percent for the coming years, the lowest of the post-World War II era. That compares with an average of 3.1 percent from 1995 to 2005 and 2 percent from 2005 to 2012.

There are several pieces to the gloomier picture, all pointing in the same direction.


First, there's slower labor force expansion. The rate at which the American workforce is growing is now at a crawl. Part of that is surely due to the deep 2008 recession and tepid, prolonged recovery; when there aren't many jobs out there and wages aren't rising, fewer people may consider themselves part of the workforce (the labor force includes both those who have a job and those who are actively looking for one). Back in 2009, for example, forecasters were expecting the labor force participation rate to gradually drift downward, but not as quickly as it has, as this chart shows.


Feroli and Mellman, citing Census projections, note that growth in the working-age population will slow down even more in the years ahead, with an 0.92 percent growth rate in 2012 falling to 0.84 percent in the next five years and to 0.51 percent in 2050. Unless there is a significant reversal in either immigration patterns or birth rates, the number of prime working-age adults in the United States is expanding a lot more slowly than it has in the past. And such reversals don't look so likely, either. Since 1989, the inflation-adjusted spending on U.S. border security has increased 730 percent, the researchers note, and "as we see little political appetite for relaxing enforcement of border security, we believe even with a more robust economy we are unlikely to see a return to the levels of illegal immigration that prevailed in the first half of the last decade."

That's the labor force side of things. The other determinant of the pace of economic growth over the very long term is productivity. Here, the evidence is less definitive; the origins of higher worker productivity are a bit mysterious, given that they depend on innovations that haven't happened yet. But in the Feroli and Mellman analysis, the evidence points to pessimism.

Worker productivity has been rising only slowly in the last three years, at an 0.7 percent annual rate, the analysis notes, compared with the 2.25 percent post-World War II average pace. The researchers attribute that in part to companies slashing research and development during the financial crisis.

But those effects should fade as the economy gets back on track and companies ramp up their R&D. What about the longer term? Not so great.

JPM-IT equip

Prices for information technology products are not falling at the rate they were just a few years ago, suggesting the rate of IT advancement isn't what it has been. "Gains in information technology are routinely credited with the strong growth in the supply side of the U.S. economy in the 1995-2005 period," Feroli and Mellman write. "If that technological growth is slowing . . . then this could have quite significant implications for the U.S. economy's potential growth rate."

What to make all of this? If the researchers are right, and the United States' economic potential will grow at only 1.75 percent a year, not the 3 percent a year of the 1990s or the annual 2 percent of the last decade, the impact won't be felt immediately. But over even moderate periods of time, it will make a huge difference. If the economy grows at 3 percent annually over the next 25 years, the United States would have a 36 percent bigger economy than if it grows 1.75 percent annually.

That is the difference between remaining a global economic superpower and becoming  just one of several large, important global economies (pending how things go in more populous nations like China and India, that is).

And if the analysis is right, and we have downshifted to a slower pace of potential growth, we will hit the speed limit of this recovery -- the point at which inflation becomes a risk -- sooner than forecasters are commonly thinking. Either way, Americans may want to hope that Feroli and Mellman are wrong, even as the evidence they marshal seems pretty much right.



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Lydia DePillis · August 14, 2013

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