The U.S. economy to 2024
The U.S. economy continues to heal in the aftermath of the Great Recession. Steadily recovering consumption, investment, and housing assist an improving economy, whereas structural factors, such as an aging population, limit the prospects for more rapid growth over the coming decade. The Bureau of Labor Statistics (BLS) projects that growth will continue, but at a slower rate than that seen before the onset of the 2007–09 recession.
The United States is now more than 6 years into a recovery characterized by slow growth in gross domestic product (GDP), a declining labor force participation rate, low inflation, and disappointing productivity gains. From 2010 to 2014, GDP growth averaged just 2.1 percent annually, a much slower rate than the 3.0-percent or higher annual growth experienced in recent decades.1 (See figure 1.) Despite the slow recovery in GDP, the unemployment rate fell from a peak of 10.0 percent in October 2009 to 5.0 percent in November 2015. The decline was due to minimal growth in the labor force and lower-than-average productivity gains, rather than the rapid GDP growth that typically follows recessions.
The severity of the Great Recession took a toll on several important components of GDP. Muted growth in personal consumption expenditures (PCE), contractionary government policies, widening trade deficits, and a weakened housing market all contributed to slower GDP growth. Meanwhile, core PCE inflation remains below the target of the Federal Reserve (hereafter, the Fed), despite the federal funds rate2 being at the lower bound. While the recovery is well along the way, the U.S. economy is not quite back at full employment. Although the unemployment rate fell to 5.0 percent in November 2015, wage growth after the recession has been minimal. Employment levels for long-term unemployed workers, marginally attached workers, and those working part time for economic reasons are improving, but remain below prerecession levels.
Determining how the U.S. economy will behave over the next 10 years is challenging, because the business cycle cannot be anticipated or modeled well over extended periods. Modern macroeconomic theory assumes that, in the long run, the economy moves along a growth path consistent with full employment. As the economy moves along this path, inflation, output growth, and employment growth are steady. When the economy overheats, the rate of unemployment falls and wage growth ensues. These effects result in inflation overshooting the Fed’s target. Slack in the labor market, as experienced in recent years, produced little inflationary pressure, even though the federal funds rate has been near its lower bound since late 2008. The market can overheat or fall short of potential growth in the short run, but over time it gravitates back to the full-employment path.
Using a full-employment model, the Bureau of Labor Statistics (BLS) projects that GDP will grow at 2.2 percent annually over the coming decade, maintaining its average growth rate experienced during the 2010–14 recovery. By comparison, figure 1 shows that, from the 1960s through the onset of the 2007–09 recession, 10-year average GDP growth exceeded 3 percent. The projected relatively lower growth in GDP is due mostly to the slowing growth in labor supply. As baby boomers age and move into lower participation cohorts, the labor force participation rate is expected to continue to decline, hindering growth prospects. Nonfarm payroll employment is projected to add just 9.3 million jobs over the coming decade, growing at 0.7 percent annually. Labor productivity is expected to register 1.8-percent annual growth. As the economy improves and inflationary pressure resumes, interest rates will recover substantially from their current lows; however, they will not reach prerecession levels.
1 Historical data come from the National Income and Product Accounts (as of June 2015) 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 were not incorporated. Unless otherwise noted, levels cited are measured in chain-weighted 2009 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. All references to growth rates refer to compound average annual growth, unless otherwise noted.
2 The federal funds rate is the Fed’s target for the interest rate that banks charge other banks for overnight loans. For more information, see “What are the tools of U.S. monetary policy?” (Federal Reserve Bank of San Francisco, February 6, 2004), http://www.frbsf.org/us-monetary-policy-introduction/tools/.