A Deeper Dive - Is 3% GDP Growth Sustainable?
In a Nut Shell:
- There is significant, ongoing debate about just how much GDP growth is actually affected by lower tax rates.
- A strong workforce is key to achieving GDP growth.
- The growing population of retirees and those approaching retirement coupled with lower birthrates have created a workforce shortage that shows no signs of improving.
- Immigration can play a role in solving the workforce issue, but how to accomplish that is the stuff of sensitive debates.
A Deeper Dive - Is 3% GDP Growth Sustainable?
Last quarter's Deeper Dive looked closely at The Fear Index. This quarter, we thought we’d jump into the debate over GDP growth and its potential. With the quarter end tax reform announcement and accompanying proclamations of how such reforms will drive GDP growth, some context and perspective is called for.
The recent tax reform proposal includes a number of items that by themselves would appear to reduce taxes or government revenues. A central part of the proposal, therefore, hinges on those tax cuts and simplification driving stronger economic growth that ultimately offsets the cuts to make them more revenue neutral.
Economists and politicians (typically informed by economists) have debated this dynamic for decades. Will lower taxes spur more business activity and result in faster GDP growth? As with most things that involves as many moving parts as a country’s economy, the answer is never clear cut. If it was, the debate would be settled by now and countries around the world would be one upping each other with tax cuts to driver faster and faster growth. After all, who wouldn’t want greater growth? Economic growth solves a lot of problems – although some might argue it merely hides them for a little longer.
It’s with this last sentence that we move forward with the question of just how much will deregulation, tax cuts, repatriation of foreign capital, etc. boost GDP growth long term? There is little debate that they’ll boost short-term growth, but the longer-term picture is much murkier and begs the question of whether we are solving our problem or simply putting a Band-Aid on it.
GDP growth is ultimately a result of two very straightforward things – the productivity of the labor force and the size of the labor force. If we think about this in the context of an individual business it is a little easier to envision. A business that is operating close to current capacity has two options if they want to grow. They need to either make their current employees more productive or they need to hire more employees. Pretty simple. This is conceptually what the U.S. economy is dealing with, but on a much larger scale.
Here is the rub. By most measures (low unemployment rate, capacity utilization, etc.) the U.S. economy is already running at close to full speed. So in order for growth to accelerate and be sustained we need to look at productivity and the size of the labor force. The following chart produced by J.P. Morgan Asset Management as part of their Q4 Guide to the Markets shows some historical perspective on both.
US Labor Productivity
This is represented in the chart by the growth in real output per worker (grey bar). There are plenty of debates about the accuracy or measurement of this figure, but there is a consensus that this figure has been declining steadily for the last decade and generally tends to be very “sticky”. Deregulation and technology can certainly impact this figure, but productivity for an economy of our size is just difficult to move significantly or quickly.
Size of Labor Force
This is perhaps the bigger issue facing the U.S. While there may be room for the U.S. participation rate to move up (i.e. more folks not working and not looking for work return to the workforce) the real needle movers here are not likely to change in any meaningful way overnight. The number of retirees continues to swell and simply outnumber the younger demographic entering the workforce. According to the Population Reference Bureau, the number of Americans ages 65 or older is projected to more than double by 2060 and will increase as a share of the total population from 15% to 24%.
This a demographics issue and there is obviously little that will change in regards to the growth of the retiring population, but what about the other side of the equation? As the following chart shows, general birth rates in the U.S. have dropped by nearly half over the last 100 years and that figure has been consistent for the past 40 years. The chart also shows the baby boom generation related peak occurred in 1957 which means all those folks are now turning 60 and will soon join the retiree ranks if they haven’t already.
With an alarming shortage in the U.S. labor force, there is a case to be made for an accelerated immigration process. Immigrants have been a significant component of the U.S. labor force since our founding. Developing a policy that allows reasonable, secure growth in our legal immigrant labor force could be a factor in inching the U.S. closer to a 3% GDP growth rate.
While all of this sounds rather dour, there are positives. The tax reform plan put forth has a number of components that would be expected to positively impact near term GDP. While equity markets are anticipatory it’s typically only a few quarters out, so the longer term structural issues are likely to take a backseat as long as the near term picture looks up. Questions on the impact the GDP growth has on the market? Contact Brad Swinsburg 404-874-6244.
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