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Annual Energy Outlook 2015

Release Date: April 14, 2015   |  Next Release Date: March 2016 |  correction  |  full report

Market Trends: Trends in economic activity

Growth in business fixed investment offsets slow growth in labor force

Growth in the output of the U.S. economy depends on increases in the labor force, growth of capital stock, and improvements in productivity. In the Annual Energy Outlook 2014 (AEO2014) Reference case, U.S. labor force growth slows over the projection period as the baby boom generation starts to retire, but projected growth in business fixed investment and spending on research and development offsets the slowdown in labor force growth. Annual growth in real gross domestic product (GDP) averages 2.4%/year from 2012 to 2040 in the Reference case (Figure MT-1), 0.3 percentage point slower than the growth rate over the past 30 years. Slow long-run increases in the labor force indicate more moderate long-run employment growth, with total civilian employment rising by an average of 0.8%/
year, from 134 million in 2012 to 169 million in 2040. The manufacturing share of total employment continues to decline, from 9% in 2012 to 7% in 2040.

Real consumption growth averages 2.2%/year in the Reference case. From 2012 to 2040, the share of GDP accounted for by personal consumption expenditures varies between 66% and 71%, and the share spent on services rises mainly as a result of increasing expenditures on health care. The share of GDP devoted to business fixed investment ranges from 10% to 16% of GDP through 2040.

Issues such as financial market reform, fiscal policies, and financial problems in Europe, among others, will affect both shortrun and long-run growth, adding uncertainty to the projections.

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Growth in business fixed investment offsets slow growth in labor force

AEO2014 presents three economic growth cases: Reference, High, and Low (Figure MT-2). The High Economic Growth case assumes higher growth and lower inflation, relative to the Reference Case, and the Low Economic Growth case assumes lower growth and higher inflation. The short-term outlook (five years) in each case represents current views of economic activity in the United States and the rest of the world, the impacts of fiscal and monetary policies, and potential risks to economic activity. The long-term outlook includes smooth economic growth and assumes no shocks to the economy.

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Differences among the Reference, High, and Low Economic Growth cases reflect different expectations for growth in population (specifically, net immigration), labor force, capital stock, and productivity, which are above trend in the High Economic Growth case and below trend in the Low Economic Growth case. The average annual growth rate for real GDP from 2012 to 2040 in the Reference case is 2.4%, as compared with 2.8% in the High Economic Growth case and 1.9% in the Low Economic Growth case.

Figure MT-2 compares the average annual growth rates for output and its major components in each of the three cases. Compared with the 1985-to-2012 period, investment growth from 2012 to 2040 will be faster in all three cases, whereas consumption, government expenditures, imports, and exports will grow more slowly in all three cases. Opportunities for trade will expand in all three cases, resulting in real trade surpluses that continue to grow throughout the projection period.

For energy-intensive industries, output growth is strong early, then slows after 2025

With a rapidly growing service sector and imports meeting a large share of demand for goods in recent decades, industrial sector shipments have expanded more slowly than the overall economy [1]. In the AEO2014 Reference case, real value of shipments for all goods and services [2] grows by 2.0% from 2012 to 2040, for the industrial sector by 2.1%/year, and for the service sector by 2.0%/year. Industrial sector manufacturing grows by 2.3%/year and nonmanufacturing by 1.6%/year (Figure MT-3).

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The Reference case shows two distinct periods of growth, and the energy-intensive industries display the sharpest contrast between the periods. With increased shale gas production affecting U.S. competitiveness, growth in U.S. manufacturing output accelerates through 2025. From 2012 to 2025, real GDP grows by an average of 2.5%/year, and the industrial sector grows by 2.8%/year. After 2025, industrial output growth slows as a result of increased foreign competition and rising energy prices, with energy-intensive industries showing the largest slowdowns—from a 2012-25 average of 2.0%/year to a 2025-40 average of 0.7%/year. The 2012-40 output growth rates vary among industries, with iron and steel averaging 0.9%/year and the cement industry 2.5%/year.

Industrial production growth is strongly linked to exports, along with consumer demand and investment. Declining exchange rates, combined with modest escalation in unit labor costs, increase U.S. exports in the projection. From 2012 to 2040, real exports of goods and services increase by an average of 5.5%/ year, while real imports of goods and services grow by an average of 3.8%/year.