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

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

By mid-2003, business investment started to recover, benefiting partly from a temporary tax break that allowed companies to write off their investment in new plant and equipment and partly from a reduction in the capital gains and dividend tax rates. (16) The ensuing turnaround in business investment during the 2004-06 period, and especially in 2006, was dramatic because of continuing growth in output, a tight labor market, and strong demand for new capital equipment. Between 1996 and 2006, nonresidential spending for equipment and software exhibited a growth rate of 6.1 percent annually, far exceeding the pace of GDP growth over the same timeframe. (See table 6.)

After the collapse of the dot-com market, investment in nonresidential construction, including buildings for office use and industrial buildings, dropped by about 8.0 percent from 2000 to 2003. Moreover, a sizable decline in investment in power and communication facilities occurred during the 2004-05 period. Nevertheless, purchases of nonresidential structures have picked up during the past couple of years, due in part to a decline in available space when the investment slump in the early 2000s left many markets with too few new buildings. Taken together, all these changes during the early years of the 21st century resulted in purchases of nonresidential structures increasing at an average annual pace of 0.3 percent between 1996 and 2006, in contrast to a decrease of 0.4 percent over the 1986-96 period.

BLS projections indicate that, over the coming decade, the U.S. economy will expand at a steady pace with good profitability, technological innovation, and solid growth in demand. Meanwhile, nonresidential investment in equipment and software is expected to grow at a sustainable rate of 4.9 percent per year from 2006 to 2016. Purchases of nonresidential structures are anticipated to grow faster than the historical pace, but still modestly, at a 1.5-percent rate of growth annually over the projection period.

Residential investment. When the U.S. economy entered into a recession in 2001, the strength of the housing market kept the downturn short and mild. After 5 boom years of record sales for new and existing homes from 2001 through 2005, the housing market dropped in 2006. Clearly, the robust upswing in the previous housing market cycle was due largely to a combination of particularly low mortgage rates and high expectations of rapid growth in housing prices. In addition, immigration into the United States fueled activity in the housing market. When rates on a 30-year mortgage sank to a four-decade low of 5.37 percent in April 2004, housing starts surged to 1.95 million units that year, followed by an all-time high of 2.07 million units in 2005. The national homeownership rate set a record high of 69.0 percent in 2004 and repeated the performance in 2005. Overall, residential construction grew at a historically high average of 8.3 percent annually from 2003 to 2005.

Starting in 2006, however, the once-hot housing market cooled considerably when potential buyers found home ownership less affordable in the face of rising housing prices and mortgage interest rates. Slowing demand led to sharply increasing numbers of homes on the market and resulted in stagnating housing prices. Defaults mounted in the market for subprime home loans and led to a wave of foreclosures and more homes remaining in an oversupplied market. In many markets across the Nation, home sales and prices fell sharply as a result. New-home sales plunged to 1.051 million units in 2006, down from a record 1.283 million units in 2005.