How Fast Can the U.S. Grow?
Written by Richard Hokenson
For nearly 150 years, real GDP per person in America has increased at an amazingly stable average rate of about 2% per year (see Chart 1).
Real per capita GDP of $51,517 in 2016 is nearly 17 times greater than it was in 1870, when it was $3072. Despite this impressive long-run track record, the consensus forecast for future growth in real GDP appears to be mainly centered on less than 2% per year which would translate into less than 1% growth in real per capita GDP. We disagree. Although the most recent years have been subpar, we are very encouraged by the fact that the 5-Year Compound Annual Growth Rate (CAGR) of real GDP per person has nearly recovered to the long-run average (see Chart 2).
In combination with population growth of 0.7% to 0.8%, that implies long-run real GDP growth of 2.7-2.8% per year. And it is not just the long-run that we are optimistic about. The current media focus on the sequential slowdown in real GDP growth in the fourth quarter of 2016 overlooks the fact that the year-ago growth rate accelerated (see Chart 3). And it is the year-ago comparison that matters for company earnings. Last but certainly not least, it also appears that the global growth rate is accelerating.
An increasingly synchronized world business cycle will result in higher prices for commodities. The surprise will be that finished goods inflation and wage growth remains moderate.
Ceverllati, Matteo, Uwe Sunde and Klaus F. Zimmerman (2017), “Demographic dynamics and long-run development: Insights for the secular stagnation debate”, Journal of Population Economics (2017) 30: 401-432.
Fernald, John G (2016)., “Reassessing Longer-Run U.S. Growth: How Low?, Federal Reserve Bank of San Francisco.
Gagnon, Etienne, Benjamin K. Johannsen and David Lopez-Salido (2016), “Understanding the New Normal: The Role of Demographics”, Finance and Economics Discussion Series 2016-080. Washington: Board of Governors of the Federal Reserve System.
Jones, Charles I. (2015), “The Facts of Economic Growth”, National Bureau of Economic Research, Working Paper 21142.
Richard Hokenson is a pioneer in the application of demographics to economic and financial market forecasting.