Pethokoukis, Economics, U.S. Economy

The Great Stagnation: JP Morgan declares US potential GDP growth just half of what it used to be

It wasn’t so long ago, like the 1990s, that the potential US growth rate was thought to be around 3.5% a year. But in a stunning new report, JP Morgan economists Michael Feroli and Robert Mellman say those days are over. The summary of their research notes “US future isn’t what it used to be: potential growth falls below 2%.” From the bank:

1. The long-run growth potential of the US economy continues to slide lower, by our estimate, to around 1.75%; if realized this would be the lowest of the post-WWII era

2.  Potential GDP growth is commonly decomposed into potential labor supply and trend productivity growth, and both appear headed lower

3. Within labor supply, the growth in the population is slowing, due to well-known long run demographic trends, and more recently a sharp slowing in immigration

4. Added to this, the aging of the population will likely exert downward pressure in labor force participation rates, which will likely further depress the trends in hours worked

5. The demographic slowing has been well-telegraphed; what is more striking is the recent slowdown in productivity growth, some of which is cyclical, but much of which is structural

6. Information technology drove much of the recent (1995-2005) productivity boom, and price measures indicate the trend in the pace of technological gain in this sector is slowing

7. This in turn has reduced the incentive of firms to heavily invest in ever more recent vintages of IT equipment, slowing the pace at which workers are equipped with newer and better machines

8. Another factor reducing productivity growth is slower growth in R&D spending. While this could change, the impact of the current slowdown could be felt in productivity numbers for years to come

9. Slower trend GDP growth means the large amount of slack resources in the economy can be absorbed relatively quickly, and thus a quicker normalization of monetary policy can be achieved

I expect plenty of push back from the techno-optimists, but probably not from the Obama White House, which has already declared in its most recent budget: “In the 21st Century, real GDP growth in the United States is likely to be permanently slower than it was in earlier eras because of a slowdown in labor force growth initially due to the retirement of the post-World War II baby boom generation, and later due to a decline in the growth of the working age population.” If JPMorgan is correct, the US debt problem just got worse and US living standards will rise more slowly in the future. (And, interestingly, another JP Morgan economist, James Glassman of Chase, is more upbeat in my previous post.)

More to come …

3 thoughts on “The Great Stagnation: JP Morgan declares US potential GDP growth just half of what it used to be

  1. it’d be higher if JP Morgan and the other banksters didn’t use the Federal Reserve to SKIM off a percentage of the whole economy as they make “money” from nothing and charge US “interest” on it.

  2. What about the real growth limiting factors such as excessive regulation and taxation? I wait for the day a major bank comes out with that report.. Then again, they need to get bailed out when they take enormous risks. Can’t upset the hand that feeds you.

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