Monday, June 15, 2015

4% Sustained GDP Growth?

by Bill McBride on 6/15/2015 08:50:00 PM

Tuesday:
• At 8:30 AM ET, Housing Starts for May. Total housing starts increased to 1.135 million (SAAR) in April. Single family starts increased to 733 thousand SAAR in April. The consensus is for total housing starts to decrease to 1.090 million (SAAR) in May.

There has been some discussion if sustained 4% growth in the U.S. can be achieved. Here are two articles:

From Neil Irwin at the NY Times The Upshot: Jeb Bush Wants 4 Percent Growth. That Will Be Hard to Reach.

[F]or 4 percent growth to be realistic in the next presidential term — not just for a one-quarter spurt but on a sustained basis — one of two things must apply. Either the technocrats at places like the C.B.O. and the Fed must be wildly underestimating the nation’s growth potential today. Or a revolution in American productivity must be on the way. Neither of those are things that a president has much control over.
And from Matthew Klein at the Financial Times Alphaville: Jeb Bush’s growth goal isn’t outlandish



I was surprised that neither author mentioned demographics.  When we ask if sustained 4% is possible, we have to look at demographics and productivity (See: Demographics and GDP: 2% is the new 4%).

As I noted "One simple way to look at the change in GDP is as the change in the labor force, times the change in productivity. If the labor force is growing quickly, GDP will be higher with the same gains in productivity. And the opposite is true."

So there are two ways to boost GDP growth: 1) larger increases in productivity, and 2) larger increases in the labor force.  Productivity gains seem to come in spurts - unrelated to policy (as Irwin noted).  And the only ways to have larger increases in the labor force is for either significantly more immigration, or build a time machine and convince everyone to have more babies 30 years ago.  Both seem equally unlikely.

The good news is the prime working age population will grow a little faster over the next decade - and that will boost growth a little.