Business Cycle Update
What It Would Take for U.S. Economy to Grow at 4% Rate
Long-term economic growth likely to remain slower than history; short-term increase possible under certain scenarios
Dirk Hofschire, CFA | Senior Vice President, Asset Allocation Research
Lisa Emsbo-Mattingly | Director of Asset Allocation Research
Irina Tytell, PhD | Senior Research Analyst, Asset Allocation Research
Austin Litvak | Senior Analyst, Asset Allocation Research
Key Takeaways
• The new presidential administration has a stated goal of boosting real (inflation-adjusted) U.S. growth to 4%, a much higher rate than has been experienced in recent decades.
• Achieving 4% growth over the long term appears extremely challenging, given the current U.S. demographic outlook.
• A shorter-term growth acceleration is possible, although it would likely require a healthy dose of fiscal stimulus (and deficit expansion).
• The potential upside from more stimulative fiscal policies may be constrained by the maturing— although still healthy—nature of the U.S. business cycle.
• We continue to favor global equities, though smaller asset allocation tilts are warranted due to the advanced stage of the U.S. business cycle, fuller valuations for riskier assets, the potentially wide distribution of policy outcomes, and rising geopolitical risk.
The pace of real (inflation-adjusted) economic growth in the United States has slowed structurally in recent decades, and the new presidential administration has stated a goal of boosting growth to a much higher 4% rate. This article investigates how the secular and cyclical backdrops may affect the ability of the United States to achieve a higher growth rate.
Long-term U.S. growth is likely to be much slower than history
Over long periods of time, the pace of real GDP growth in an economy can be approximated by the sum of two things: labor-force growth (new workers added to the economy) and productivity growth (increased production from those workers). As seen in Exhibit 1, both U.S. labor- force and productivity growth peaked decades ago and have slowed since. Since 1996, the labor force has grown roughly 1% a year, while productivity has increased about 1.5%, resulting in real GDP that has averaged just below 2.5% for the past two decades.
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