Academic journal article Monthly Labor Review

The U.S. Economy to 2006

Academic journal article Monthly Labor Review

The U.S. Economy to 2006

Article excerpt

Slowing GDP growth is tied to slowing labor force growth; exports and imports continue to be the fastest growing major components of GDP, with high-technology products leading the way

At first glance, the BLS projection of the aggregate U.S. economy for the 1996-2006 period may appear placid, as moderating growth in the labor force constrains economic performance. Real gross domestic product (GDP) is projected to grow at the rate of 2.1 percent per year over the projection period and will reach approximately $8.5 trillion by 2006 in chained (1992) dollars.(1) (See table 1.) By comparison, GDP grew at an average annual rate of 2.3 percent during 1986-96.(2) Nevertheless, the temperate pace of overall economic growth belies activity occurring below the surface.

Over the next 10 years, certain sectors of the economy will undergo dramatic growth, while others will recede in importance. Reflecting increased globalization of the economy, the foreign trade sector will continue to be the fastest growing component of real GDP. Exports are projected to grow almost 3 1/2 times faster than GDP, while imports are expected to rise at almost 3 times the rate of GDP. By 2006, the levels of exports and imports will each approach 20 percent of GDP.

Besides foreign trade, gross private domestic investment (or, simply, private investment) will also assume a more substantial position in the economy over the 1996-2006 period. Private investment is projected to increase at a rate 1 1/2 times faster than the rate for GDP. Underlying the growth in foreign trade and private investment will be an expanding commerce in high technology and computer-related products. Accordingly, the BLS projection anticipates that new markets and new products will be important features of the economy over the next 10 years.

While some sectors of the economy are expected to advance, others will decline in relative importance over the projection period-most notably, the Federal Government. As it has in the recent past, real defense spending (consumption and gross investment) is projected to decline from 1996 to 2006.(3) However, the projection for Federal non-defense spending shows a reversal from recent trends. Unlike the growth rate of 2.0 percent per year posted for 1986-96, nondefense spending is expected to decline 0.8 percent per year from 1996 to 2006. In effect, Federal expenditures will be pressed by efforts to control the Federal deficit in the face of continued growth of transfer payments.

The discussion of the economic projection begins with an outline of key underlying assumptions. The article then examines more closely the projection for the economy over the 1996-2006 period by looking at each sector of GDP in further detail. Lastly, the sensitivity of the projection to changes in underlying assumptions is examined.

Underlying economic assumptions

To generate an economic projection, the Bureau employs a macroeconomic model with nearly 300 exogenous variables.4 These variables constitute inputs into the model, rather than quantities determined by it. The value of an exogenous variable generally depends upon a decision into which significant noneconomic factors intrude; for example, security and foreign policy considerations substantially influence the level of defense expenditures. Given these noneconomic influences, many judgments about the level of an exogenous variable could be justified. Accordingly, the sensitivity analysis in this article considers how changes in exogenous variables would affect the economic projection.

Besides exogenous variables, the macroeconomic model contains in excess of 1,150 equations. These equations determine the values of the behavioral variables, as well as establish certain required relationships between variables (so-called identities). The behavioral variables include those of primary interest for aggregate demand and employment, such as real GDP, its components, and the unemployment rate. …

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