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

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

Turning to fiscal policy on government-outlays-related assumptions, real increases in gross defense investments are foreseen as it becomes necessary to replace or improve the equipment available to the Armed Forces. As regards other fiscal-policy-related assumptions, Federal grants-in-aid to State and local governments are assumed to slow their growth, reflecting a shift of more responsibilities from the Federal Government to State and local levels. By contrast, due in substantial part to the coming retirement of baby boomers and to continued increases in health care costs, rapid growth is assumed in the Federal Government's Medicare Program.

Energy assumptions. Amid surging demand, worries over possible supply shortages, and tensions in the Middle East, U.S. crude-oil prices reached a record $79 per barrel in July 2006 before retreating to around $60 a barrel by the end of the year. Beginning in May 2007, oil prices rose again, reaching about $90 per barrel in October. For the past 2 years, helped by growing income and profits, consumers and businesses have absorbed the impact of the rise in oil prices. BLS energy assumptions are developed from the U.S. Department of Energy's annual energy projections. Under the basic assumption of no further shocks from the Organization of the Petroleum Exporting Countries (OPEC) and an optimistic outlook regarding the long-term supply potential of non-OPEC producers, the BLS projects a decline in world oil prices from current high levels, with prices expected to hover around $55 per barrel in nominal dollars in 2016. In addition, new technologies are expected to hold prices down, and some alternative energy supplies might enter the market over the next decade. (7)

Demographic assumptions. As mentioned earlier, demographic factors play a key role in determining the growth potential of the economy over the long term. The growth rate of the U.S. population, together with changes in its composition, has a considerable impact on the labor force, the unemployment rate, housing demand, and other categories of spending. BLS assumptions in these areas are based on the Census Bureau's middle-series population projections, with its "interim" projections adjustments. (8) The Census Bureau projections show the U.S. population expanding at an average of 0.9 percent annually between 2006 and 2016, attaining a level of 327.0 million by the end of the period. Growth in the older age cohorts will be strong as baby boomers age. The 77 million baby boomers, who make up a quarter of the Nation's population, will have a variety of significant effects on the labor force and on labor force participation rates.

The BLS prepares labor force and participation rate projections for detailed age, sex, race, and ethnicity groups. Presented elsewhere in this issue, (9) these more detailed projections are aggregated to produce the higher level projections. Overall, the BLS expects the labor force to grow from 151.4 million in 2006 to 164.2 million in 2016, representing an annual growth rate of 0.8 percent over the projection period.