by Margaret Jacobson and Filippo Occhino
The economy continues to expand at a slow pace. Real GDP rose at an annual rate of 1.3 percent in the second quarter of 2012, down from 2 percent in the first quarter. The recent subpar growth rates, together with the pattern of productivity and hours worked, suggest that the trend level of real GDP is growing slower than in the past (see "Is Moderate Growth the New Normal?"). Here, we investigate this issue, looking for evidence on the current and long-run growth rates of the real GDP trend.
Learning about trend growth is important for several reasons. Current trend growth helps determine how the gap between actual and trend GDP is evolving over time, which in turn has implications for the outlook of economic growth and inflation. Long-run trend growth is even more important, as it is the rate at which the economy will expand in the long run.
We begin with a simple measure of trend growth that is based on real GDP data only. To construct it, we eliminate all short-term and medium-term fluctuations, including business cycles, and we keep the long-term changes only. According to this measure, trend growth reached a peak rate above 4 percent at the beginning of the 1960s, declined to rates well below 3 percent in the late 1970s, and partially recovered in the 1980s, only to drop further in the late 1990s and 2000s toward the current 2 percent rate. Other measures based on real GDP data lead to slightly different estimates, but they all agree that trend growth is currently close to historically low rates.
Besides real GDP data, other information is useful for estimating trend growth. Real GDP trend growth can be decomposed into the sum of the trend growths of three components: output per employee (employee productivity henceforth), the labor force, and the ratio of employment to the labor force. The latter component, which is related to changes in the trend of the unemployment rate, contributes little to real GDP trend growth, so we focus on the other two components, first on employee productivity and then on the labor force.
To learn about the trend growth of employee productivity, we look at its average growth rate in the past. Employee productivity grew rapidly at a 2.57 percent average rate in the 1948:Q2-1973:Q1 period. Then, the average growth rate dropped to 1.04 percent in the 1973:Q2-1995:Q2 slowdown period, picked up to 2.23 percent in the 1995:Q3-2003:Q3 acceleration period, and then declined again to 1.11 percent afterward.