While Ben Bernanke will never agree that global economic growth has ground to a halt as a result of his monetary policies, a phenomenon which in the past year has been dubbed "secular stagnation" by the very serious weathermen (and will certainly never admit the reason for such stagnation), with every passing month one thing becomes clear: there can be no growth and certainly no prosperity for the broader population with a $200 trillion (and rising at over $10 trillion per year) overhang in global debt. And now, even Goldman gets it.
Having recently cut its estimate of US trend productivity growth to 1.5%, in a shocking move earlier today, Goldman admitted US trend growth is far less than previously speculated (or, "secularly stagnating") and moments ago lowered its long-term potential GDP. The bank says: "after adjusting for a drag from government sector productivity and incorporating an updated assessment of trend labor force growth, we now see long-run potential GDP growth at 1¾%, half a percentage point below our prior estimate."
This is a huge deal as Goldman just recalibrated every single economic (i.e., inflation, employment) and financial (i.e., bond rates, leverage) equation by more than 20%, not to mention the amount of implied residual slack in the economy. In short, an absolutely massive amount!
But whatever happened to Jan Hatzius' repeat forecasts that the US would grow at an "above consensus" rate of 3-4% as far as they eye could see? When will he revise these?
In any event, all else equal, Goldman just admitted that the US standard of living will henceforth grow over 20% slower.
It also means that the Penguin express of Wall Street weathermen are about to jump on board, as will the various regional Feds starting with the Bill Dudley-run NY Fed, before aunt Yellen, too, has to admit that not only is the long-term US growth rate lower than previously expected, but that as a result, the slack in the economy is also far, far less and as a result, the Fed most certainly has a green light to hike, even as soon as June.
Full note below:
Lower Measured Productivity = Lower Potential GDP (Dawsey)
- We recently reduced our estimate of US trend productivity growth to 1½%, mainly due to a downgrade in our view of trend total factor productivity (TFP). In today’s Daily, we refresh our view on potential GDP growth in light of our new productivity estimates. After adjusting for a drag from government sector productivity and incorporating an updated assessment of trend labor force growth, we now see long-run potential GDP growth at 1¾%, half a percentage point below our prior estimate.
In our most recent Weekly, we reduced our estimate of US trend productivity growth?traditionally measured as growth in nonfarm business output per hour—from 2% to 1½%. The most important factor behind slower productivity growth over the past decade appears to be a smaller contribution from the IT sector. Indeed, Exhibit 1 shows that trend productivity growth of around 1½% would be similar to that seen during the two decades through the mid-1990s, but would be significantly lower than that during the dot-com productivity boom. Although we have argued that measurement issues may be resulting in an undercount of value added by information technology, and as a result downwardly distorted productivity figures, we do not expect these measurement issues to be addressed any time soon. As such, we expect measured productivity growth to run below its historical average going forward.
Exhibit 1. Back to a Sluggish Rate of Measured Productivity Growth
Looking at the issue with a different lens, we have found the "growth accounting" approach to productivity forecasting to be helpful in past work. In this framework, productivity growth can be broken into: (1) the contribution from growth in capital services, (2) the contribution from changes in labor composition, and (3) growth in total factor productivity (i.e. the residual component). Based on the outlook for capital spending, labor force growth, educational attainment, and other demographic changes, we expect contributions from capital services and labor quality that are very similar to our prior estimates. Over the coming ten years, we expect capital services to contribute about 0.9 percentage point (pp) per year to productivity growth, and labor composition to add another 0.1pp.
However, our prior estimate for growth in total factor productivity (TFP) now looks too high. As the strong productivity period before 2004 fades further into the background and new data for 2013 and tentative estimates for 2014 have become available, our estimate of the TFP trend has fallen back to the ½% trend seen from 1974 to 1995 (Exhibit 2). That said, assessing the trend in TFP is difficult, not least due to heightened volatility in the years around the Great Recession. We think a reasonable confidence band around our TFP estimate is roughly 1 percentage point. Uncertainty aside, combining our point estimates for the contribution from capital services, labor composition, and TFP results in a trend productivity estimate of 1½%.
Exhibit 2. TFP Trend Looks Lower
Productivity measures that are typically quoted—including the official productivity release from the Labor Department—refer to growth in nonfarm business output per hour worked. In order to convert the estimate to "total economy" productivity, an adjustment must be made for the fact that (by virtue of how the national accounts are constructed) productivity in the government sector is a mechanical drag. Historically, subtracting about four-tenths of a percentage point has been appropriate (very roughly: 20% government share of GDP multiplied by roughly -2% "missing" productivity growth vs. the rest of the economy). However, as we anticipate a slower rate of productivity growth in the private sector vs. the historical average in the future, we think that a subtraction of roughly three-tenths is appropriate going forward.
The last piece needed to arrive at an updated estimate of potential GDP growth is a projection for growth in potential hours worked. Because weekly hours per employee will likely be stable over the long term, we focus on growth in the potential labor force. Using updated Census projections for population growth by age category released in December 2014, combined with an assumption of stable participation by age group in the long term, we think that potential labor force growth will average about 0.5 percentage point over the next ten years, similar to CBO's assessment. Exhibit 3 shows that potential labor force is likely to be below growth in the 16+ population, as the average age of the US population is increasing and older individuals are less likely to participate in the labor force.
Exhibit 3. Potential Labor Force Growth Will Likely Fall Short of Population Growth
Adding up the pieces, growth in nonfarm business output per hour of 1½%, a "total economy" adjustment of about -0.3pp, and potential labor force growth of about 0.5pp sum to a potential GDP growth estimate of 1¾%, half a point below our prior estimate. Of course, the same "new economy" measurement issues that we identified as potentially affecting productivity growth feed through directly to measured GDP growth, and so we would be cautious of confident pronouncements that the true standard of living in the United States is likely to grow more slowly than in the past.