This may be the economy’s new normal — unfortunately.
The Congressional Budget Office and a growing number of private analysts say the potential annual growth rate in the U.S. has downshifted to about 2 percent from 3 percent on average since the turn of the century because of an aging population, reduced immigration, growing income inequality and other factors.
The CBO, Capitol Hill’s nonpartisan budget agency, has cited the disappointing performance of the economy since 2000 as a reason for lowering its own output estimate 7.3 percent by 2017.
The economic growth rate has averaged an uninspiring 2 percent in the five years since the Great Recession, but that was not the main reason for the downgrade. Instead, it was a lower growth rate for the U.S. during the expansion from 2002 to 2007, which ended with a spectacular housing market collapse and financial crisis.
“The trend is not our friend,” said Vincent Reinhart, chief economist at Morgan Stanley.
He predicts that the U.S. growth rate will continue to average around 2 percent for years to come and that the unemployment rate will fall no lower than 6 percent on average as a result of the aging workforce, reduced business innovation and other fundamental changes in the economy.
Another hallmark of the recovery from the recession has been a decline in the share of adults who choose to work. The percentage of working-age Americans active in the labor market has sunk to the lowest levels since the 1970s.
Although that phenomenon has puzzled economists and provoked a sharp debate about whether Americans have lost their legendary work ethic, all sides agree that a large part of the decline is the result of a long-expected wave of baby boomer retirements — a trend that will accelerate in coming years and weigh down economic growth.
The drop in labor force growth figured prominently into the CBO’s thinking about the economy. Agency analysts estimate that demographics, immigration and other factors will suppress growth in the labor force from an average of 1.5 percent a year from 1950 to 2013 to no more than 0.5 percent in the next decade. As a result, analysts say, the economy will grow no more than 2.1 percent on average — close to its performance today.
While the CBO emphasizes a connection between the sluggish recovery and slow growth in the labor force, the International Monetary Fund has blamed the diminished performance in part on growing income disparity. The wealthy have captured more than 90 percent of U.S. income gains since the recession, but they are more inclined than lower-income households to save the money rather than spend it in a way that sparks stronger growth.
A faltering middle class
The middle class historically has been the engine of growth, with consumers overall accounting for about 70 percent of economic activity, but many middle-income Americans are now saddled with stagnant incomes, high debt loads and reduced access to credit since the housing market collapse.
Consumers have had to depend on growth in wages to fuel spending, but average wages have barely kept up with inflation since 2008.
Other economists assign some blame to Washington, with a toxic mix of partisan gridlock, increased regulation, high business tax rates and President Obama’s health care law that forces businesses to spend more on insurance coverage and less on wages or other investments that might perk up the average growth rate.
Whatever the factors, the trend is a big disappointment to political leaders and economists who have waited in vain for signs of growth rising back to a historic norm of about 3 percent. Many economists predicted the economy would reach that point this year because it appears to be shedding the last vestiges of the housing recession that led to serious mortgage and debt troubles, and because a historic wave of budget austerity at all levels of government is waning.