Market Trends: Trends in economic activity

With lower labor productivity growth, investment is key to improving living standards

Growth in labor productivity is an important determinant of economic growth [1]. Since the end of the latest U.S. recession in June 2009 [2], labor productivity has been slow to recover. From 1987–2014, U.S. labor productivity growth averaged 1.9%/ year [3]. The average rate of growth in the previous expansion (2001–07) was 2.6%, compared with 1.3%/year in the current expansion (2009–15). In the AEO2016 Reference case, labor productivity growth averages 1.7%/year from 2015–40. From 2009–15, the number of hours worked by private, nonfarm workers has increased by an average of 0.7%/year, compared with 0.3%/year from 2001–07. This difference implies that growth of output has not kept pace with growth of hours worked. In the AEO2016 Reference case, the number of hours worked grows by an average of 0.9%/year from 2015–40, compared with the historical average of 1.2%/year from 1987–2014, and real GDP grows by an average of 2.2%/year from 2015–40,which is below the historical average of 2.6%/year from 1987–2014 (Figure MT-1).

Many economists attribute the current slump in labor productivity to the slow recovery of capital spending. Businesses servicing excessive debt after the financial crisis have delayed investment spending until they can restore their financial positions, and lower capital investment leads to higher costs of production and distribution of all goods and services. Investment spending as a share of GDP from 2001–07 was 12.6%, compared with 12.1% from 2009–15. In the AEO2016 Reference case, investment spending averages 14.4% of GDP from 2015–40, compared with the historical average of 12.5% from 1987–2014.

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Three economic growth cases show a range of possible future trends in economic growth

The AEO2016 Reference, High Economic Growth, and Low Economic Growth cases illustrate three possible paths for U.S. economic growth from 2015 to 2040 (Figure MT-2). The High Economic Growth case assumes higher growth and lower inflation than in the Reference case, and the Low Economic Growth case assumes lower growth and higher inflation. In each case, the short-term outlook (five years) represents different IHS Global Insights scenarios [4] of economic activity in the United States and the rest of the world, the impacts of fiscal and monetary policies, and potential risks that could affect U.S. economic activity.

Beyond five years, all three cases assume smooth economic growth and no shocks to the economy. Differences among the AEO2016 Reference, High Economic Growth, and Low Economic Growth cases reflect different expectations for growth in population (specifically, net immigration), labor force, capital stock, and productivity. The projections 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 gross domestic product from 2015 to 2040 in the Reference case is 2.2%, compared with 2.8% in the High Economic Growth case and 1.6% in the Low Economic Growth case (Figure MT-2). Compared with the 1987–2014 period, both the Reference and Low Economic Growth cases show lower growth for all components of the U.S. economy over the projection period, and the High Economic Growth case shows higher growth for all components of the economy, except for trade.

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Industrial sector output growth highly dependent on trade

In the future, growth of the U.S. industrial sector [5] contributes to overall economic growth, led by growth in the production of manufactured goods, which in 2015 accounted for 17% of the total real value of shipments of all goods and services in 2015 [6]. In the AEO2016 Reference case, manufacturing shipments grow by 1.9%/year from 2015 to 2040, compared with overall industrial sector growth of 1.9%/year and 1.7%/ year growth in nonmanufacturing shipments (Figure MT-3). In the first 5 years of the projection, industry growth rates vary in response to changes in economic factors, such as a strong dollar or low energy prices, but by 2025 growth becomes consistently positive across all industries. In the last decade of the projection, however, growth slows in certain industries (for example, pulp and paper and bulk chemicals) and increases in other industries (for example, primary metals and metal-based durables) in response to changes in U.S. net exports.

In the Low and High Economic Growth cases, industry growth rates generally mirror changes in the rate of GDP growth. However, in the final decade of the projection period, growth rates for the bulk chemical industry are slower in the High Economic Growth Case than in the Reference case, because appreciating exchange rates reduce net U.S. exports of industrial supplies. For the other energy-intensive industries, growth rates in the High Economic Growth case are higher than in the Reference case, as a result of increasing net exports of labor-intensive consumer and capital goods.

Industrial production growth is strongly linked to trade, along with consumer demand and investment. In the Reference case, declining exchange rates and modest growth in labor costs lead to increased U.S. exports. From 2015 to 2040, real exports of goods and services increase by 4.3%/year on average in the Reference case, compared with average increases of 3.8%/year for real imports of goods and services. The growth rate for net exports of industrial supplies is strongest in the first 10 years of the projection period, and the growth rate for net exports of capital and consumer goods is strongest in the last 10–15 years of the projection.

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Endnotes

1. Labor productivity is measured as output per hour in private, nonfarm business.
2. As determined by the Business Cycle Dating Committee of the National Bureau of Economic Research, the most recent U.S. business contraction was from December 2007 to June 2009, the previous business expansion was from November 2001 to December 2007, and the current business expansion began in June 2009. See National Bureau of Economic Research, “US Business Cycle Expansions and Contractions,” http://www.nber.org/cycles.html.
3. See U.S. Department of Labor, Bureau of Labor Statistics, “Multifactor Productivity Trends News Release” (Washington, DC: June 23, 2015), http://www.bls.gov/news.release/archives/prod3_06232015.htm.
4. Modified for EIA’s energy prices and other key assumptions.
5. The industrial sector includes manufacturing, agriculture, construction, and mining. The energy-intensive manufacturing sectors include food, paper, bulk chemicals, petroleum refining, glass, cement, steel, and aluminum.
6. Value of shipments includes both final and intermediate products.