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

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

Under the circumstances, it is difficult to predict how deep the housing downturn will be and how long it will last, especially in light of the downturn in the subprime mortgage market and rapid developments in the credit market. Nevertheless, over the long term, the number of homes constructed will depend less on interest rates than on demographic trends. In 2009, the last of the baby boomers will have passed the prime home-buying age range of 25 to 44 years--the range in which people exhibit the greatest propensity to establish and maintain independent households. Spending on residential investment is anticipated to stay weak for some time and stabilize in the latter portion of the projection period. A moderate 1.7-percent average annual growth rate is expected over the 2006-16 period, while housing starts are expected to number about 1.818 million units in 2016, almost the same as the 1.812 million units started in 2006.

Business investment as a whole is expected to increase at a rate of 3.1 percent per year for the 2006-16 period, with higher growth of nonresidential investments offsetting lower growth of residential investment. This 3.1-percent-per-year business investment growth translates to a 0.5-percentage-point annual contribution to the 2.8-percent rise in real GDP over the 2006-16 projection span. Nominal private investment's share of GDP is anticipated to be about 16.6 percent in 2016, almost no change from its 16.7-percent share measured in 2006. (See table 2 for data on real GDP and table 3 for data on nominal GDP.)

Foreign trade in goods and services and current account. The United States is becoming increasingly integrated with the global economy in trade of goods and services, as well as in finance. During the 1990s, a strong U.S. dollar and falling foreign commodity prices in emerging markets helped keep the Nation's rate of inflation low and, combined with other factors, helped trigger strong growth in consumer spending. Clearly, globalization creates opportunities because of the emergence of greater U.S. competitiveness in a growing world economy. Globalization also creates challenges to the U.S. economy, including a widened trade deficit in total goods and services. The trade deficit has posed increasing difficulties for the U.S. economy since the 1990s.

Although a weaker dollar is now making U.S. exports more competitive overseas, exports are being hindered by slower growth in the foreign markets, (17) especially in Europe. At the same time, strong U.S. demand for goods from abroad continues to bring in more imports. Coupled with a steep rise in the price of imported oil, the slower foreign growth of exports and the robust demand for imported goods have caused the U.S. trade gap to balloon to a record high in 2006, with real imports exceeding real exports by $625 billion. (See table 7.)

As a share of GDP, nominal exports increased from 7.2 percent in 1986 to 11.1 percent in 1996 and remained at the same 11.1 percent in 2006, while the nominal import share of GDP increased from 10.2 percent in 1986 to 12.3 percent in 1996 and jumped further, to 16.9 percent, by 2006. (See table 3.) In terms of real growth, exports increased at a 9.1-percent annual rate from 1986 to 1996, while imports posted an average annual growth rate of 6.1 percent. Over the 1996-2006 period, exports exhibited a 4.5-percent rate of growth and imports grew much more rapidly, at 7.6 percent. (See table 7.) As mentioned earlier, the widening deficit posted in 2006 reflected higher oil prices, which increased the Nation's import bill; in addition, it reflected the American consumer's rising appetite for foreign-made goods, which helped to nudge the trade deficit higher.