The U.S. economy to 2016: slower growth as boomers begin to retire

Monthly Labor Review, Nov, 2007 by Betty W. Su

Real GDP growth is expected to average 2.8 percent a year over the next decade, less than its previous 10-year trend, while productivity growth is expected to slow as well; continued increases in defense spending and strong foreign markets also characterize the outlook for the coming decade

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As of late 2007, the U.S. population is aging, with baby boomers approaching their retirement years. The high productivity growth of the late 1990s and early 2000s appears to be slowing. Globalization marches on. In this context, the Bureau of Labor Statistics (BLS) has projected economic trends for the U.S. economy to 2016. Under the assumptions used in developing these projections, gross domestic product (GDP) is expected to reach $14.9 trillion in chained 2000 dollars by 2016, an increase of $3.6 trillion over the 2006-16 projection span. Rising by an average annual rate of 2.8 percent, GDP is projected to grow at a slower pace, less than the 3.1 percent posted over the preceding 10-year period.

Demographic factors are a primary driving force in determining the growth potential of the economy over the long term. BLS anticipates that, as the 77 million baby boomers begin to retire in the next few years, the pace of labor force growth will slow down over the projection horizon. (1) Other factors, such as capital input and productivity growth, also will contribute to the slower growth. As regards employment prospects in the next decade, slower growth in civilian household employment is expected, from a rate of 1.3 percent per year during the 1996-2006 period to 0.8 percent annually between 2006 and 2016. The latter percentage translates into an employment increase of 11.5 million over the projection horizon, less than the increase of 17.7 million across the 1996-2006 decade. The BLS employment projection is accompanied by an assumed unemployment rate of 5.0 percent in 2016, up from 4.6 percent in 2006.

Reflecting the increased globalization of the U.S. economy, international and foreign trade activities are expected to continue their fast-growing trend over the projection period. Personal consumption expenditures are expected to grow along with GDP, and business investment in new equipment and software will continue to play a major role in the economy over the projection span. On the government side, a projected increase in defense spending reflects long-term efforts to fight global terrorism and to ensure U.S. domestic security.

After the economic boom of the 1990s--the longest economic expansion in U.S. history--the Nation's economy weathered many challenges, including recession, terrorist attacks, two wars, corporate scandals, the dot-com burst, and oil price hikes. (2) Despite the setbacks that buffeted the economy, one of the most striking features of the period was the uninterrupted surge in productivity growth. During the late 1990s, a fundamental change in the pace of labor productivity emerged. Businesses began to use a wide range of technological advances and managerial innovations to improve their supply chain management and information systems and to better tailor their products and services to meet customer demands. Rapid innovation led to the implementation of new technology in capital equipment, which, in turn, contributed substantially to the acceleration in productivity.

The strong productivity gains gave the economy enough momentum to overcome the effects of the 2001 recession. From 1996 to 2006, U.S. nonfarm business productivity rose at a pace of 2.6 percent per year, significantly faster than the 1.5-percent growth registered during the 1975-95 period. The speedup allowed the economy to grow strongly, with a low rate of unemployment and without causing price pressures and rising interest rates.

Every 2 years, the BLS develops a set of projections for the U.S. economy as part of a program of studies aimed at analyzing long-term economic growth and its implications for the structure of employment by industry and occupation. This article focuses on projected trends in the aggregate economy for the 10-year period from 2006 to 2016; it sets the stage for BLS projections of detailed industry and occupational employment. The article begins with highlights of the macroeconomic model and its key underlying assumptions. Then projections of GDP and its demand categories are examined, as are projections of income growth, labor productivity, and employment. The last section briefly addresses uncertain factors that might have a significant impact on the economic projections. Each section of the article describes the projections in the context of trends covering the 2006-16 period and is based on apparent economic relationships over the previous decade or two.

The macroeconomic model

To generate an economic projection, the BLS employs a macroeconomic model provided by Macroeconomic Advisers, LLC, a St. Louis, Missouri, based forecasting group. (3) The company's quarterly model comprises 744 variables in 543 equations descriptive of the U.S. economy; 201 of the variables are exogenous--variables whose values must be provided to the model in order to calculate a solution for a given period. Among the 201 exogenous variables, only a relatively small number significantly affect the long-term projections of the value of GDP and its demand makeup, as well as the level of employment necessary to produce that value of GDP. Included in the list of critical assumptions are those having to do with monetary and fiscal policies, the U.S. energy outlook, and population growth and demographics. The key assumptions are listed in table 1.