‹ Analysis & Projections

Annual Energy Outlook 2011

Release Date: April 26, 2011   |  Next Early Release Date: January 23, 2012  |   Report Number: DOE/EIA-0383(2011)

Trends in Economic Activity

Real growth in gross domestic product averages 2.1 to 3.2 percent across cases

AEO2011 presents three views of economic growth (Figure 45). The rate of growth in real gross domestic product (GDP) depends on assumptions about labor force growth and productivity. In the Reference case, growth in real GDP averages 2.7 percent per year due to a 0.7 percent per year growth in the labor force and a 2.1 percent per year growth in labor productivity.

figure data

GDP growth in 2010 partially offsets the decline in 2009, helping GDP to recover to pre-recession levels by 2011. In the AEO2011 Reference case, economic recovery accelerates in 2012, while employment recovers more slowly. With the percentage losses in employment during the 2007-2009 recession roughly double those of the 1982 recession, the unemployment rate remains elevated for an extended period, returning to its pre-recession 2003 to 2007 average of 5.2 percent by 2022.

The AEO2011 High and Low Economic Growth cases examine the impacts of alternative assumptions on the economy. The High Economic Growth case includes more rapid expansion of the labor force, nonfarm employment, and productivity, with real GDP growth averaging 3.2 percent per year from 2009 to 2035. With higher productivity gains and employment growth, inflation and interest rates are lower in the High Economic Growth case than in the Reference case. In the Low Economic Growth case, real GDP growth averages 2.1 percent per year from 2009 to 2035, with slower growth rates for the labor force, nonfarm employment, and labor productivity. Consequently, the Low Economic Growth case shows higher inflation and interest rates and slower growth in industrial output.

Inflation, interest rates remain low, unemployment averages about 6 percent

In the AEO2011 Reference case, annual consumer price inflation averages 2.1 percent from 2009 to 2035, the annual yield on the 10-year Treasury note averages 5.4 percent (nominal), and the unemployment rate averages 6.1 percent (Figure 46). In the High Economic Growth case, population, and labor productivity grow faster than in the Reference case, leading to faster growth in capital stock, labor force, and employment. Potential output growth is faster, and as a result the annual growth rate of real GDP is 0.5 percent higher than in the Reference case. In the Low Economic Growth case, productivity, population, labor force, and capital stock grow more slowly, and real GDP growth is 0.6 percent lower than in the Reference case.

figure data

As the economy recovers, real GDP and inflation is expected to grow faster than the 26-year average. By 2020, real GDP and inflation settle into the long-run 26-year average growth rates of 2.7 percent and 2.1 percent, respectively. During the last five years of the projection (2030-2035), real GDP growth slows to 2.5 percent, reflecting slowing growth in population. Even though the 26-year average of the 10-year Treasury note and unemployment rate are 5.4 percent and 6.1 percent, respectively, from 2020-2035, the Treasury note yield and unemployment rate average 5.8 percent and 5.1 percent, respectively. The recession and its recovery with higher unemployment and lower interest rates cause a higher 26-year average of interest rates compared to the post-2020 interest rate average and the unemployment rate post-2020 is lower than its 26-year average.

Exports grow more rapidly than imports, as the dollar depreciates and countries in Asia and Latin America with higher economic growth rates develop their domestic markets and pull in more U.S. exports. Export growth supports U.S. employment, leading to lower unemployment rates and an improving trade balance over the projection period.

Output growth for energy-intensive industries slows

Industrial sector output has grown more slowly than the overall economy in recent decades, as imports have met a growing share of demand for industrial goods, whereas the service sector has grown more rapidly [87]. In the AEO2011 Reference case, real GDP grows at an average annual rate of 2.7 percent from 2009 to 2035, while the industrial sector and its manufacturing component grow by 1.7 percent per year and 1.9 percent per year, respectively (Figure 47). As the economy recovers from the recent recession, growth in U.S. manufacturing output in the Reference case accelerates from 2011 through 2020. After 2020, growth in both GDP and manufacturing output return to rates closer to the historical trend. Increased foreign competition, slow expansion of domestic production capacity, and higher energy prices increase competitive pressure on most manufacturing industries after 2020. These factors weigh particularly heavy on the energy-intensive manufacturing sectors, which taken together grow at a slower rate of about 1.0 percent per year, which reflects projections ranging from a 0.1-percent annual decline for bulk chemicals to a 1.5-percent annual increase for food processing.

figure data

A decline in U.S. dollar exchange rates, combined with modest growth in unit labor costs, stimulates U.S. exports, eventually improving the U.S. current account balance. From 2009 to 2035, real exports of goods and services grow at an average annual rate of 6.3 percent, and real imports of goods and services grow by an average of 4.6 percent per year. Strong growth in exports is an important driver for growth projections in the transportation equipment, electronics, and machinery industries.

Energy expenditures rise, but decline relative to gross domestic product

figure data

Energy expenditures in the U.S. economy totaled $1.1 trillion (2009 dollars) in 2009, lower than the 2007 level of $1.3 trillion. As the economy recovers and energy prices rise, energy expenditures grow to $1.7 trillion in 2035 in the Reference case, $1.9 trillion in the High Growth case, and $1.5 trillion in the Low Growth case (Figure 48). The energy intensity of the economy (thousand British thermal unit (Btu) of energy consumed per dollar of real GDP) was 7.4 in 2009. With structural shifts in the economy, improving energy efficiency, and higher real energy prices, U.S. energy intensity falls to 4.4 in 2035.

figure data

From 2003 to 2008, rising oil and natural gas prices increased the energy expenditure share of nominal GDP; the 9.8-percent share in 2008 was the highest since 1985. In 2009, the average cost of oil to refiners fell to $54 per barrel [88], natural gas prices fell by about half, and the energy expenditure share fell to 7.4 percent. The energy expenditure share declines throughout the projection (Figure 49), reflecting economic growth and declines in energy intensity.