What’s Realistic for GDP?

June 02, 2017

Though GDP growth varies greatly throughout an economic cycle, the last several decades have seen it slowly decline. One of the many promises made by Trump and other presidential candidates during the election was to restore GDP to its higher levels once again. But even with beneficial policy changes, is it possible to achieve 3%-4% year-over-year growth?

GDP growth essentially comes from two areas: an increase in the number of workers or an improvement in output per worker. Output per worker, or productivity, generally comes from businesses investing in technology and equipment to improve efficiency.  In this week’s chart, we’ve estimated this by taking the difference between growth in GDP and total workers. As the chart shows, productivity gained very little the last several years as most of GDP’s growth came from an improvement in the employment situation. The exception to this came during the financial crisis when employers tried to cut costs and become leaner. It seems after this there has been little room for businesses to become more efficient.

What makes this concerning is that the growth seen in employment is not sustainable. With the unemployment rate at about 4.5%, we are either at or nearing full employment, meaning that any growth in workers has to come from people joining the worker force. However, the opposite is expected over the next 10 years as baby bombers continue to retire. This suggests that productivity will have to improve just to maintain the current growth rate of the economy. While things like tax reform and infrastructure spending should boost growth, it seems unlikely that GDP will return to more historic levels any time soon.

Print PDF