The U.S. economy to 2022: settling into a new normal
No one could have predicted the length of time that the economy has required to recover. A variety of economic headwinds have battered the recovery, causing output growth to be somewhat slower than was expected in prior projections. Over the coming decade, growth is expected to be gradual but persistent, bringing the unemployment rate down and returning the macroeconomy to a more stable position.
Given the depth of the “Great Recession” and the economic troubles that the financial crisis has caused, few people were under the illusion that recovery would be immediate. However, many may not have anticipated the protracted time it has taken for the economy to strengthen. Since the end of the recession, the U.S. gross domestic product (GDP) has grown at a rate of only 2.1 percent annually.1 A variety of economic headwinds have battered the recovery, keeping the growth of jobs and output slow. Tight credit conditions and high-risk aversion have prevented consumers and businesses alike from acting definitively. Interim solutions for the federal budget and the debt ceiling added further uncertainty to the economic climate, and substantial budget cuts acted as a drag on growth.2 Only recently have rebounds in home prices and construction, factors in prior recoveries, been evident. The Federal Reserve System continues to pursue bond-buying programs and is holding interest rates at the lower bound in response to low inflation rates and high unemployment. Based on historical standards, the current economy seems much less robust than would be expected 4 years after the official end of a recession.3
Moving forward, there are reasons to believe that growth will continue to be slower than was originally hoped. Annual U.S. GDP growth exceeding 3.0 percent, as experienced in the mid- to late 1990s and mid-2000s, is not expected to be attainable over the coming decade. The length and nature of the recession have left lasting scars on the economy.4 With the persistent high levels of long-term unemployment, a concern exists that individuals’ skills will deteriorate or the individuals will become permanently discouraged from job seeking. High unemployment likely inhibited the usual churn that helps create better matches between worker skills and employer needs, hurting economic efficiency. Furthermore, restrained investment during the recession could be hindering growth prospects. A reluctance to grow capital stocks, implement new technologies, or fund new enterprises during the downturn can prevent businesses from reaping productivity gains in the subsequent years. Combined, these impacts may have lowered the growth rate of potential GDP. Following a downturn, a period of above-average growth is often expected to ensue, as output returns to its potential level. Instead of a few booming periods followed by average sustainable growth, growth is more reasonably expected to remain continually below prerecession rates.
Looking forward to 2022, the U.S. Bureau of Labor Statistics (BLS, the Bureau) expects slower GDP growth to become the “new normal.” In addition to the recession’s impact on potential growth, the economy faces a number of hurdles. As the nation’s demographic shift continues, with the baby-boom generation moving into retirement, the labor force participation rate will continue to decline, moderating growth. The need to keep the debt-to-GDP ratio under control will weigh heavily on fiscal decisions. Continued reductions to federal spending will slow growth5 and cap discretionary spending on projects that could create jobs or research and spawn technological progress. Housing remains one bright spot in the projections: even at slow rates, population growth implies a need to create homes for additional people, spurring activity in the construction sector.
1 Historical data come from the National Income and Product Accounts as of June 26, 2013, and are published by the Bureau of Economic Analysis. Data are available online at http://www.bea.gov/. Because the projections data are finalized well before publication, revised historical data, including changes made during the 2013 NIPA (National Income and Product Accounts) Comprehensive Revision, were not incorporated prior to publication. Unless noted, levels cited are measured in chain-weighted 2005 dollars. For a discussion of the uses and limitations of chain-type indexes, see J. Steven Landefeld and Robert P. Parker, “BEA’s chain indexes, time series, and measures of long-term economic growth,” Survey of Current Business, May 1997, http://www.bea.gov/scb/account_articles/national/0597od/maintext.htm.
2 See Sylvain Leduc and Zheng Liu, “Uncertainty and the slow labor market recovery,” Economic Letter, no. 2013-21 (Federal Reserve Bank of San Francisco, July 22, 2013), http://www.frbsf.org/economic-research/publications/economic-letter/2013/july/us-labor-market-uncertainty-slow-recovery/.
3 The National Bureau of Economic Research is responsible for determining the official start and end dates of recessions in the United States. The most recent recession began in December 2007 and lasted through June 2009.
4 See speech by Ben S. Bernanke, “The economic recovery and economic policy,” given at the New York Economic Club, November 20, 2012.
5 See Brian Lucking and Daniel Wilson, “U.S. fiscal policy: Headwind or tailwind?” Economic Letter, no. 2012-20 (Federal Reserve Bank of San Francisco, July 2, 2012), http://www.frbsf.org/economic-research/publications/economic-letter/2012/july/us-fiscal-policy/.