While last week’s U.S. Q2 GDP report disappointed on the downside, it was part of a longer period of sub-par growth. This reflects a significant deterioration in the potential growth rate of the U.S. economy.
The sum of labor force and productivity growth is a simple way to estimate the trend GDP growth rate of an economy. The chart above shows the 5-year moving averages of labor force and productivity growth in the U.S. The data are smoothed to remove cyclical fluctuations in both series and to get a better sense of the long-term trends. The chart is quite sobering. Taken at face value, it suggests that U.S. trend growth has slowed to a multi-decade low of around 1%.
Although this exercise tells more about the past performance of the economy, it is hard to be optimistic that trend growth will suddenly re-accelerate. Demographics will dictate the growth in the labor force. In a report published late last year, the Bureau of Labor Statistics estimates that the U.S. work force will grow at an average annual rate of 0.5% for the next decade. Productivity trends are much more difficult to forecast. However, weak business investment and a potential peak in education attainment argue for continued slow productivity growth.
Weaker trend GDP growth will imply slower growth in corporate profits and also a lower equilibrium real interest rate for the economy. Please see the next Insight for a discussion of the real interest rate.