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

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

GDP from the demand side

In the 1990s, the U.S. economy recorded the longest uninterrupted period of expansion in its history. Technological developments brought a wide range of sophisticated new electronics products. Innovations in telecommunications and computer networking spawned a vast computer hardware and software industry and changed the way many industries operate. The economy grew rapidly and corporate earnings rose sharply. With low inflation and low unemployment, the Federal Government posted a budget surplus and the stock market experienced an unprecedented boom. Real GDP growth reached a historical high at an average of 4.4 percent annually from 1996 to 1999.

The U.S. economic performance slowed in 2000 and tipped into a recession in 2001. The 2001 recession was a production-side recession, led by unsustainable business capital investment and equity market bubbles, but consumer spending and the housing market remained relatively healthy. During three quarters of decline in 2001, GDP registered a mild drop. However, the lingering effects from the weakening of the technology sector, the terrorist attacks, the emergence of corporate finance scandals, and the wars in Afghanistan and Iraq had an impact on some business sectors during the recovery period.

In mid-2003, the U.S. economy began to grow more strongly. Buoyed by Federal tax cuts, gains in household wealth, growing optimism about the pace of business investment, and continued strength in corporate profits, real GDP grew at an average rate of 3.4 percent annually during the 2003-05 period. This rate was sufficient to generate moderate employment growth. In 2006, although a rising trade gap and a slump in the Nation's housing market undercut U.S. economic performance, GDP growth remained stable at a rate of 2.9 percent per year. (10) As mentioned earlier, over the 2006-16 span, real GDP is projected to grow at an average annual rate of 2.8 percent. (See table 2.)

GDP measures the total output of the economy. Another indicator for assessing how well an economy performs is the growth of GDP per capita. It is important to recognize that the two indicators do not necessarily move in the same direction. For example, a massive increase in labor supply would tend to increase GDP, but reduce GDP per capita and real wages. (11) Clearly, GDP per capita is a key measure of purchasing power, and most economists believe that it is an adequate proxy for well-being because it summarizes or otherwise quantifies important aspects of the average availability of goods and services. The BLS projects that real GDP per capita will grow at an average annual rate of 1.9 percent over the 2006-16 projection period, down slightly from a 2.0-percent growth rate between 1996 and 2006. (See table 2.)

Personal consumption expenditures. Personal consumption spending, which fuels two-thirds of U.S. economic activity, is the largest component of demand. During the last economic expansion, buoyed by steady income growth and sharply increasing wealth from rising asset prices, consumer spending accelerated at a robust pace. From 1996 to 2000, consumer spending grew by 4.6 percent yearly.