What Determines Long-Run Growth?

Transcription

1 September 1997 What Determines Long-Run Growth? In the first quarter of 1997, real gross domestic product (GDP) grew at a surprising 4.9 percent annual rate. The general consensus among economists is that this is not a sustainable rate. So how fast can the economy grow? The level of output of an economy is determined by the level of inputs (land, labor and capital) used and the production methods used to convert the inputs into goods and services. Output can only be increased through additional inputs or more efficient use of available inputs. How fast we can increase inputs is limited, however: Land is essentially fixed. Population growth and participation rates determine the size of the labor force. In less-developed economies, a large fraction of inputs are underutilized and the level of capital is usually low. These economies can grow rapidly by increasing inputs and/or by increasing production efficiency for example, by moving toward state-of-the-art technology and raising the level of education. A developed economy like the United States, starting from a higher level of input use and efficiency, has less margin for high rates of growth. Innovation and improvements in existing technology are the keys to increased growth rates. The conventional wisdom is that the potential growth rate of the U.S. economy is between 2.0 and 2.5 percent annually. This range reflects a projected growth in the labor force of about 1 percent and a trend growth of 1.0 to 1.5 percent in labor productivity (output per hour), which captures capital accumulation and technological improvement. The chart shows the historical index of business labor productivity and the labor force in logarithms, so that the slopes of these graphs are the growth rates. Both variables show a distinct reduction in slope at different points. Average growth in business productivity slowed from 3.3 percent annually before 1973 to 1.2 percent annually after The growth in the labor force slowed from 1.6 percent annually up to 1973 to about 1.4 percent annually since 1980, after the baby boomers had entered the workforce. Correspondingly, GDP slowed from an average annual growth rate of 3.9 percent between 1948 and 1973 to an average annual rate of 2.6 percent between 1980 and 1996, primarily reflected in the slowdown in labor productivity growth. (Hours worked grew more slowly than the labor force during the pre-1973 period, reflecting shorter work weeks.) If recent increases in investment in new technology can foster trend productivity gains comparable to the pre-1973 period, then the United States can look forward to a rise in the potential growth rate of the economy, but sustained growth at the 4.9 percent rate seen in the first quarter of 1997 is unrealistic. In the final analysis, the keys to long-run economic growth are the microeconomic incentives that induce individuals to work and firms to invest in production technology, within the limits imposed by demographics and the rate of technological advances. Donald S. Allen Labor Force and Business Productivity 34 I I I I I I I I I I I I I I I I I I I i t i TVTI I I I il I I I I I I I I I il ir v i "I I I I I Note: Average annual rates of growth over each period are shown in parentheses. Trend breaks occur in 1973 and 1980 for productivity and the labor force, respectively. Views expressed do not necessarily reflect official positions of the Federal Reserve System

2 Tabi eofcon ten ts Page 3 Economy at a glance 4 Output and growth 7 Interest rates 8 Inflation and prices 10 Labor markets 12 Consumer spending 14 Investment spending 16 Government revenues, spending, and debt 18 International trade 20 Productivity and profits 22 Quick reference tables 27 Notes and sources Conventions used in this publication: 1. Charts and tables contain data that was current on September 2, Shaded areas indicate recessions, as determined by the National Bureau of Economic Research. 3. refers to simple percent changes. from year ago refers to the percent change from the same month or quarter in the previous year. The percent change at annual rate shows what the growth rate would be over an entire year if the same simple percent change continued for four quarters or twelve months. The. percent change at annual rate of X between the previous quarter t-1 and the current quarter f is: 100 x Xf For monthly data replace 4 with All data with significant seasonal patterns are seasonally adjusted, unless labeled NSA. National Economic Trends is published monthly by the Research Division of the. For more information on data, please call (314) Single-copy subscriptions are available free of charge by writing to the Public Affairs Office,, Post Office Box 442, St. Louis, MO or by calling (314) or (314) Information in this publication is also included on the Federal Reserve Economic Data (FRED) electronic bulletin board at (314) or Internet World Wide Web server at

3 National EconomicTrends Real GDP Growth at annual rate 6 Consumer Price Index f 1994 Industrial Production Interest Rates Percent L l i L 'I III d -0.6 T i i ULIl 1994 Change in Nonfarm Payrolls Thousands "I... I... I Unemployment Rate Percent of labor force ~ I... I... 3

4 4 National EconomicTrends Beal Gross Domestic Product from year ago Industrial Production and Purchasing Managers (NAPM) Indexes from year ago 18 Index 74 Aggregate Private Nonfarm Hours from year ago 12 - Real Change in Business Inventories Percent of GDP 2-2 i I r ï I T I I... I... I " I i...i I I...I I I I I l I I r i I...l

5 National EconomicTrends Real Final Sales and GDP at annual rate 6 5 Real GDP Revisions at annual rate 8 ~'l I Advance I I Preliminary Y //////A Final! Annual Revision Industrial Production and NAPM Index Index 68 96:2 96:3 96:4 97:1 97:2 Nominal Gross Domestic Product at annual rate Aggregate Private Nonfarm Hours Average Weekly Private Nonfarm Hours Hours [ Real Change in Business Inventories Billions of 1992 dollars Inventory-Sales Ratio Manufacturing and trade T T 1M

6 6 National EconomicTrends Contribution of Components to Real GDP Growth at annual rate 1 0 _ Q3 95Q4 96Q1 96Q2 96Q3 96Q Q2 Consumption Exports 1 1 Government Real GOP 1 Imports 1 1 Inventories V / / / A Investment Contributions to Real GDP Growth Rate rd 4th 1st 2nd 3rd 41 ) 1st 2nd Real GDP Final Sales Change in Inventory Consumption a Fixed investment Nonresidential Residential Government Federal State and Local Net Exports Exports Imports Residual

7 National EconomicTrends interest Rates Percent Treasury Yield Curve Percent H... 3m 1y 2y 5y 7y 10y 30y Total Return on Standard and Poor s 500 from year ago r a m 50 T...r...r... t...r...r...p..r...i... i... i... i... i... i... i.."t...i... i... i... i i...i...i

8 8 NationalEconomicTrends GDP Chain Price Index from year ago Consumer Price Index from year ago Producer Price Index, Finished Goods from year ago Employment Cost Index and Compensation per Hour from year ago

9 NationaìEconomicTrends GDP Chain Price Index Perœnt change at annual rate Dollars per barrel T...T...I... T...I...) Consumer Price Index Consumption Chain Price index at annual rate Producer Price Index, Finished Goods Unit Labor Cost Forcent change at annual rate T Employment Cost index from year ago Benefits Compensation perhour at annual rate

10 10 National Economic!rends Employment from year ago Unemployment, Labor Force Participation and Employment Rates Percent of labor force Percent of population Duration of Unemployment Percent of labor force Weeks

11 National Economici fends Change in Nonfarm Payrolls Thousands Change in Manufacturing Payrolls Thousands !... I... I...I Change in Household Employment Thousands Labor Force and Population from year ago I" 1 i T... r...r I I I I I I Unemployment Rate Percent Help-Wanted Advertising Index Percent

12 12 UationalEconomicTrends Real Disposable Income from year ago, quarterly data Real Consumption from year ago from year ago Retail Sales from year ago of quarterly average Debt Service as Percent of Disposable Income Percent Percent

13 National Economicïïends Real Disposable Income Personal Saving Rate 1. i i. j i. _ i i h i i ^ i i m i i I ' l 1992 f 1993 f Real Consumption Real Consumption I I I I I I I I I i I. I. l. i. l 1 ~ i 11 I I I ** I Retail Sales ,... I... I...I Real Durables Consumption and Vehicle Sales Millions of vehicles, annual rate Autos and light trucks 6 - ft l k A i Consumer Sentiment (U. of Michigan) Index 110 Real Durables Consumption , 1992 [ 1993 ' 1994 ' ' 1997 ' 10 t... T... T

14 14 HationaìEconomicTrends Real Investment Percent of GDP Real Private Fixed Investment from year ago Real Nonresidential and Producers Durable Equipment Investment from year ago Real Residential Investment from year ago 6 0 -

15 National EconomicTrends Gross Saving Rates and Net Foreign Investment Percent of GDP Percent of GDP r - 4 Real Private Fixed Investment at annual rate Nondefense Capital Goods Orders from year ago, excluding aircraft [ j... T...! Real Equipment Investment at annual rate 25 - Real Nonresidential Investment at annual rate Real Residential Investment F ercent change at annual rate Housing Starts Millions, annual rate

16 16 Nat iona I Economic Tren ds Govt. Consumption and Investment Billions of 1992 dollars 1400 Government Receipts and Outlays Percent of GDP Federal Outlays, 1994 Federal Receipts, 1994 Defense 22.70% Personal Income 39.67% Social Security 20.24% Net Interest 12.90% Corp. Profit 11.40% Other 8.41% Medicare 10.50% Medicaid 5.33% Other 28.32% Social Insurance 40.53% State and Local Outlays, 1994 State and Local Receipts, 1994 Education 37.66% Personal Income 13.82% Corp. Profit 3.15% Sales Income Property.16% Medical Care 17.32% Other 10.10% Other 19.13% Transportation 6.80% Safety 10.44% Social Insurance 7.73% Federal Grants 20.99%

17 National Economic frenc/s Gross Federal Debt Percent of GDP *... Federal Deficit Percent of GDP T..i...I... f... I... i...i...ì...r...i...i...i Change in Gross Federal Debt Percent of GDP Federal Deficit, Unified Basis Billions of dollars, fiscal years 300 «s' ^ Government Budgets Billions of dollars National Income Accounts Calendar Years T '"...I...I... r...t"""...t " I Unified Budget Fiscal Years State and Local Federal Federal Surplus or Surplus or Receipts Expenditures Delicit(-) Receipts Expenditures Deficit)-) Receipts Outlays Surplus or Deficit(-)

18 18 National EconomicTrends Trade and Investment Income Balances Billions of dollars Exchange Rates Index, March x (Deutsche mark/us$) YenAJSS Goods Export Shares, 1996 Goods Import Shares, 1996 Mexico 9.28% France UK 2.36% Germany 5.06% 3.84%

19 National Economic Tren ds Trade Balance Billions of dollars Goods Trade from year ago , ]... ~~~.. Current Account Balance Billions of dollars 0 Services Trade from year ago Exports , Real GDP Growth of Major Trading Partners at annual rate United Kingdom Germany ~ Canada Fiance Mexico 19

20 20 Nat ional Economic Tren ds Output per Hour and Manufacturing Capacity Utilization from year ago Percent 90 Nonfarm Compensation per Hour from year ago 10 5 Nominal 0 Output per Hour and Multifactor Productivity, Manufacturing, annual data

21 National EconomicTrends Nonfarm Output per Hour at annual rate Manufacturing Output per Hour at annual rate _ 4 'i... I...I Selected Component Shares of National Income Percent Percent - 75 Corporate Profits after Tax (with IVA and CCAdj) from year ago n n - Nonfinancial

22 22 National EconomicTrends Nominal GDP Real GDP Final Sales Change in Business Inventories Percent chanae Percent chanae Percent chanae Billions Annual Year Billions Annual Year Billions Annual Year Billions of 1992 $ of $ rate ago of 1992 $ rate ago of 1992 $ rate ago Last qtr Year/Year ago _ Billions of 1992 $ Consumption Percent chanae Annual Year rate ago Durables Consumption Billions of 1992 $ Percent chanae Annual Year rate ago Private Fixed Investment Billions of 1992 $ Percent chanae Annual Year rate ago Nonresidential Investment Billions of 1992 $ Percent chanae Annual Year rate ago

23 GDP Chain Price Index Employment Cost Index NationaìEconomicTrends ECI: Wages ECI: Benefits Annual Year Annual Year Annual Year Annual Year Index rate ago Index rate ago Index rate ago Index rate ago Exports Imports Percent chanae Nonfarm Output per Hour Nonfarm Compensation/Hr Billions Annual Year Billions Annual Year Annual Year Annual Year of 1992 $ rate ago of 1992 $ rate ago Index rate ago Index rate ago * » ' »

24 24 National EconomicTrends Thousands Household Survey Employment Change Percent chanae Annual Year rate ago Nonfarm Payroll Employment Thousands Change Percent chanae Annual Year rate ago Index Nonfarm Aggregate Hours Monthly rate Percent chanae Annual rate Year ago Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr j May Jun Jul

25 National Economicïïends Unempl. Rate Billions of dollars Retail Sales Percent chanoe Monthly/ quarterly Annual rate Year ago Index Industrial Production Percent chanoe Monthly/ quarterly Annual rate Year ago Treasury Yields 3 -m o 1 0 -y r Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul

26 26 National Economicïïends Index Consumer Price Index Monthly/ quarterly Percent chanae Annual Year rate ago Year to date Index vvjiiauiiici nice irm less Food and Energy Monthly/ quarterly Percent chanae Annual Year rate ago Year to date Index rroaucer rnce maex Finished Goods Percent chanae Monthly/ Annual quarterly rate Year ago Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul

27 UationalEconomicTrends Notes Pages 4, 5: Final sales is gross domestic product (GDP) minus change in business inventories. Advance, preliminary, and final GDP growth rates are released during the first, second, and third months of the following quarter. Changes result from incorporation of more complete information. The Purchasing Managers Index is a weighted average of diffusion indexes for new orders, production, supplier deliveries, inventories, and employment. The National Association of Purchasing Management (NAPM) surveys over 300 firms in 20 manufacturing industries, weighting responses by industry share of GDP. Aggregate and average weekly hours are paid hours of production and nonsupervisory employees. The inventory-sales ratio uses nominal (current-dollar) inventory and sales data. Page 6: The contribution of a component X, to the overall GDP growth rate in quarter t is 100 x [(1 + (X, - X,.i)/GDPt./)4-1]. The sign is changed for imports. This calculation forces components to add up to the GDP growth rate before compounding and does not exactly match Survey of Current Business, Table 8.2. The residual line is calculated using the finest level of detail in the table. Page 7: Ten-year Treasury yields are adjusted to constant maturity. Three-month yields are secondary market averages, but all rates used in the yield curves are adjusted to constant maturity. The total return on the Standard and Poor s 500 is dividends as a percent of the value of the index plus the percent change in the index. Pages 8,9: Oil prices are monthly averages of daily spot prices for West Texas intermediate crude (Wall Street Journal). Consumer price index is for all urban consumers. The consumption chain price index is the index associated with the personal consumption expenditures component of GDP. The Employment Cost Index (ECI) covers private nonfarm employers. ECI compensation refers to a fixed sample of jobs, while compensation per hour covers all workers in the nonfarm business sector in a given quarter. In both cases, compensation is wages and salaries plus benefits. Pages 10,11: Nonfarm payroll employment is counted in a survey of about 390,000 establishments (Current Employment Survey). It excludes self-employed individuals and workers in private households, but double-counts individuals with more than one job. The household survey (Current Population Survey) of about 50,000 households provides estimates of civilian employment, unemployment rate, labor force participation rate, and employment-populatioa ratio. Population is civilian, noninstitutional, 16 years and over. New population controls introduced in January 1997 affect levels and growth rates of household survey employment, labor force and population. The unemployment rate and other ratios are minimally affected. 90 percent confidence intervals for the unemployment rate (± 0.2 percentage points) and change in household survey employment (± 376,000) measure uncertainty due to sample size. The household survey was changed in January 1994, so care should be exercised in making short-term comparisons around this date, particularly with the duration data shown on page 10. Other changes in the survey are detailed in Bureau of Labor Statistics, Employment and Earnings, Appendix A. Pages 12, 13: Debt service is an estimate of scheduled interest and principal payments on outstanding debt. The Michigan consumer sentiment index shows changes in a summary measure of consumers answers to five questions about their current and expected financial situation, expectations about future economic conditions, and attitudes about making large purchases. The survey is based on a representative sample of U.S. households. Pages 14, 15: Overall gross saving includes government saving, which is the sum of the government surplus and capital consumption (see notes for pages 16 and 17). Net foreign investment (NFI) is U.S. investment abroad minus foreign investment in the U.S. Aside from a statistical discrepancy, NFI also equals the difference between gross domestic investment and saving. Pages 16, 17: Government consumption and investment is current expenditures on goods and services, including capital consumption (depreciation) and gross investment, as reported in the National Income and Product Accounts (NIPA). The unified federal budget deficit differs from NIPA basis in four main ways: (1) NIPA excludes transactions involving existing assets; (2) NIPA outlays exclude government investment and include consumption of government capital, while unified budget outlays do the reverse; (3) NIPA accounts exclude Puerto Rico and U.S. territories; and (4) various timing issues are handled differendy. Outlays and receipts on these pages are from the NIPAs, except as noted. Since 1977, the federal fiscal year starts on October 1. Federal debt held by the public includes holdings of the Federal Reserve System and excludes holdings of the social security and other federal trust funds. Federal grants in aid to state and local governments appear in both state and local receipts and federal outlays. Pages 18, 19: The trade balance (shown on a balance of payments basis) is the difference between exports and imports of goods (merchandise) and services. It is nearly identical in concept to the net exports component of GDP, but differs slightly in accounting details. The investment income balance equals income received from U.S.- owned assets in other countries minus income paid on foreign-owned assets in the U.S. The investment income balance is nearly identical in concept to the difference between gross national product and gross domestic product, but differs in accounting details. The current account balance is the trade balance plus the balance on investment income plus net unilateral transfers to the U.S. from other countries. Pages 20, 21: Output per hour (Y/H), unit labor cost (C/Y), and compensation per hour (C/H) are indexes which approximately obey the following relationship: %(Y/H) + %(C/Y) = %(C/H) with %() meaning percent changes. Unit labor cost is shown on page 9. Real compensation per hour uses the CPI to adjust for the effects of inflation. Multifactor productivity estimates changes in output that do not correspond to changes in quantities of labor, capital, or intermediate inputs. Inventory valuation adjustments (IVA) remove the effect of changes in the value of existing inventories from corporate profits and proprietors income. (This change in value does not correspond to current production and therefore is not part of GDP). Capital consumption adjustments (CCAdj) increase profits and proprietors income by the difference between estimates of economic depreciation and depreciation allowed by the tax code. Components of national income not shown are rental income of persons and net interest. Sources Bureau o f Economic Analysis (BEA), U.S. Dept, o f Commerce National income and product accounts, international trade and i n- vestment data (except by country), auto and light truck sales Census Bureau, U.S. Dept, o f Commerce Inventory-sales ratios, retail sales, capital goods orders, housing starts, exports and imports by country Bureau o f Labor Statistics (BLS), U.S. Dept, o f Labor All employment-related data, employment cost index, consumer and producer price indexes, unit labor cost, output per hour, compensation per hour, total factor productivity United States Department o f Treasury Unified budget receipts, outlays, deficit Federal Reserve Board Index of industrial production, treasury yields, exchange rates, capacity utilization, consumer debt service The Survey Research Center, The University o f Michigan Consumer sentiment index The Conference Board Help-wanted advertising index Organization for Economic Cooperation and Development (OECD) GDP for major trading partners (not available on FRED) 27

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