GDP Forecasts Revised Down on Lack of Productivity and Labor Growth

Two factors contribute to growing GDP: the number of laborers and the level of their productivity. The Economist newspaper (as they call it) argues that America’s growth rate is unlikely to pick up anytime soon because the labor force is not growing and productivity has actually fallen. The Congressional Budget Office in the 1990s estimated productivity growth of greater than 2% per year; now the number is approximately 0%. Institutions like the International Monetary Fund and Federal Reserve have lowered their estimates for long-run GDP growth in the US to around 2%. This is a major shift downward, compared to the mid-1990s range of 3.0% to 3.5%. J.P. Morgan estimates America’s potential growth is just 1.75%, approximately half the rate it enjoyed from 1947 to 2007. Revisions partially explain why the yield on the ten-year Treasury note remains low, at around 2.5% as of last Friday, due to its long-run correlation with growth expectations. America’s workforce is getting older, the retirement rate is increasing, and immigration of highly skilled labor has sharply fallen off compared to fifteen years ago. Worse, corporate budgets allocated to research were slashed during the Great Recession, meaning innovation could be slow to materialize.  Wednesday will bring the initial estimate of second quarter GDP growth. That, too, has been revised down lately.