Global Economics By Matthew Philips
On the heels of Friday’s tepid jobs report, numerous references have been made to the U.S. economy being “stuck in second gear.” The thought is that four years into the recovery, the economy should be accelerating much faster than at the current pace of about 2 percent gross domestic product growth. But what if this is as fast as it gets? What if the U.S. economy doesn’t have a third gear?
In terms of its population, the U.S. may simply lack the demographic horsepower necessary to push GDP growth much higher than 2 percent. Just look at the growth rate of the labor force, generally considered a key ingredient to economic expansion. According to data from the Federal Reserve, the working-age population (people 20 to 65 years old) grew by an average of 2 percent a year during the 1970s. That rate has been trending down ever since, falling from 1.2 percent in the ’80s to 1.17 percent in the ’90s to 1.13 percent in the 2000s. From 2006 to 2011, the working-age population grew less than 1 percent a year.
Here’s what’s happening: Not only does the economy no longer have the benefit of a large portion of women entering the workforce for the first time, but also the 80 million baby boomers are starting to cycle out and are being replaced by age cohorts that are smaller in number. At the same time the “echo boomers,” or the youngest workers, can’t find jobs and are loaded down with student loan debt.
Making matters worse, productivity has also slowed. According to data from the U.S. Bureau of Labor Statistics, annual productivity growth accelerated steadily from the early 1970s until 2007. From 2007 to 2012 it fell to 1.9 percent, from 2.7 percent during the previous seven years. So not only does the U.S. have a slower-growing labor force, but the country’s ability to squeeze more output from its workers has stalled as well.
“An economy can grow only as fast as its resources,” says James Paulsen, chief investment strategist at Wells Capital Management. And right now those resources don’t point to anything much better than about 2 percent growth. “The speed limit of the U.S. economy is significantly less than it used to be,” Paulsen says. “For the last 25 years it’s gotten perpetually worse.”
This isn’t to say that the situation’s doomed. In fact, viewed in this light of unavoidable demographic trends, Friday’s jobs report doesn’t look nearly as bad as it did on first blush. Wages grew, and the workweek got longer. More industries added jobs than in the previous month. Plus, the dreaded, oft-cited U-6 unemployment rate, which counts those who have stopped looking for work, fell to 13.7 percent, down an entire percentage point from a year ago. Add all that to the loads of positive data that preceded the jobs report—strong manufacturing numbers, booming auto sales—and the economy looks to be doing about as well as it can at the momento.
Yet all anyone wants to talk about from Friday’s report was that the labor force participation rate fell to its lowest level in 35 years. While that’s not good, it’s much less a function of the health of the economy than it is of simple demographics. Neil Dutta, chief U.S. economist at Renaissance Macro Research, says that as much as 60 percent of the declining labor force participation rate is due to “this demographic phenomenon” of older workers choosing to retire, as opposed to the “sour grapes” of people dropping out because they can’t find work.
Has growth topped out? Probably not. A lot of economists think the second half of the year will be stronger than the first, and that by 2014 we may actually see something close to 3 percent GDP growth. But the days of 4 percent and 5 percent growth and 300,000 jobs added every month are probably a thing of the past.
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