Yesterday, we reviewed the economic forecast included in An Update to the Budget and Economic Outlook: 2016 to 2026, released by CBO on August 23. In that blog post, we discussed a number of uncertainties in the forecast and roughly quantified the range of possible outcomes over the next five years. Today, we compare CBO’s economic forecast with historical experience and discuss reasons why economic growth in coming years is projected to diverge significantly from historical trends.
According to CBO’s most recently published projections, the economy is expected to grow substantially more slowly over the coming decade than it has over much of recent history. Whereas inflation-adjusted gross domestic product (GDP) grew by an average of 3.2 percent per year from 1950 to 2015—which is about the same as the average growth rate during the 25 years preceding the 2007–2009 recession—CBO expects that it will grow by only 2.0 percent per year over the coming decade.
In large part, the projected slowdown in economic growth is due to slower growth in the labor force. During the 1950–2015 period, growth was spurred by two factors: the large increase in the working-age population that was caused by the post–World War II baby boom and the rapid rise in women’s participation in the labor force. Driven by those factors, the labor force grew by an average of about 1½ percent per year from 1950 to 2015; the average rate of annual growth in the 25 years preceding the last recession was only slightly lower. More recently, the ongoing retirement of the baby boomers and the relatively stable labor force participation rate of working-age women have led to a decline in labor force growth. Because those trends are expected to continue, CBO projects that the labor force will grow at an average rate of only about ½ percent per year over the next decade. In addition to demographic factors, that projection reflects CBO’s judgment that some people will decide to work somewhat less because of federal tax and spending policies that are set in current law.
Slower growth in the labor force accounts for only about three-fifths of the projected slowdown in the growth of inflation-adjusted GDP; slower growth in labor force productivity accounts for the rest. Labor force productivity grew by an average of about 1¾ percent per year from 1950 to 2015; the average rate of annual growth was about the same in the 25 years preceding the last recession. However, CBO projects that labor force productivity will grow at an average annual rate of less than 1½ percent over the coming decade. That slowdown is attributable mainly to two other projections that CBO has made—namely, that growth in both capital services and total factor productivity (TFP, or output per unit of combined labor and capital services) in the nonfarm business sector of the economy will also be slower. Those projections reflect CBO’s expectation that some of the unusually slow growth of TFP during the past decade will persist over part of the next decade. They also reflect the agency’s projection of greater federal borrowing under the current laws governing taxes and spending, which would crowd out some private investment.
Robert Shackleton is an analyst in CBO’s Macroeconomic Analysis Division.