The 3 Hurdles to 3% Economic Growth in the US
President Trump’s 2018 budget assumes uninterrupted increases in the pace of economic growth during each of the next three years before real GDP growth levels out at 3% for every year thereafter.
Our own forecast is less sanguine, as are those of the Congressional Budget Office (CBO) and the Blue Chip consensus.
While it is true that real GDP growth has averaged 3.2% per year since 1950, that average is skewed by much higher growth rates in the early part of that period. For more than a generation, 3% real GDP growth has been much tougher to achieve on a sustained basis.
Since 1970, average annual GDP growth has been 2.7%.
Since 2000, it is just 1.9%.
The economy’s long-run sustainable rate of economic growth is driven by three factors: labor, capital and total factor productivity (TFP). Relying on just one of these inputs to achieve 3 percent growth over the next decade would require unrealistically rosy assumptions.
For example, reaching 3% potential growth through labor alone would require potential labor hours growth in the neighborhood of the rates achieved during the period when mass inflows into the labor force occurred from baby boomers and women.
Getting all three inputs moving in the right direction at once is challenging, but the bottom chart illustrates what it might look like by comparing current projections with the most recent decade over which potential growth averaged 3%.
Replicating the 1997-2007 period would be a difficult task, as this past period included a major technological revolution and boomers in their prime working years.
None of this is to say that the economy could never grow at such a strong pace again, but history has shown that all 3 of these factors tend to change at a slow pace, which suggests long lead times before new policies could achieve the fleeting objective of 3% growth.
Source: Wells Fargo Securities, Wells Fargo Securities Website: http://www.wellsfargo.com/
Have a terrific week
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