An analysis of US potential economic growth – Part V: Conclusions

Summary

In this final installment of our five-report series, we bring our expectations for the labor force, net capital stock and total factor productivity (TFP) together in an estimate for U.S. potential economic growth by the end of this decade.

Robust immigration, strong labor force participation among foreign-born workers and remote work could strengthen labor force growth. Stronger growth in the labor force could boost potential GDP growth by 0.1-0.3 percentage points per annum in the next decade relative to the growth rates of the last decade.

The hardware and software investment required to fully develop automation and artificial intelligence (AI) capabilities in the business sector will boost capital stock growth. We estimate the net capital stock to grow between 2.5%-3.0% per year by the end of the decade. Under this assumption, net capital stock's contribution to labor productivity growth should ramp up from roughly 1 percentage point at present to 1.5 percentage points or more by 2029.

Remote work and AI could also lift TFP growth. Working from home gives individuals “relative quiet” and periods of “intense focus” that can make them more productive. Studies of labor-intensive service industries have found that the use of AI significantly reduced the amount of time needed to complete a task and/or raised the “quality” of the output.

Technological advances generally affect productivity with a long lag because it takes time for the new technology to become widely adopted. To account for these lags, we allow the 5-year moving average of TFP growth to slowly ramp up to 1.9% per annum—its high-water mark from the past productivity boom—over the next twelve years. This scenario translates to TFP growth reaching 1.2%, its long-run average, by 2029.

Thus, labor productivity could be growing 2.50%-2.75% per annum by the end of the decade in the business sector, which is considerably stronger than the rates registered during the past decade but comparable to 1992-2007. Adding in our forecast for labor force growth shows that the business sector's potential output could be growing as strongly as 3.5% per annum by 2029.

Yet, analysts typically consider the total economy, which also includes the government and non-profit organizations, not just the business sector, when thinking about growth in potential output. We estimate the potential growth rate of the total U.S. economy could rise to about 3% by the end of the decade rather than the 3.5% we expect for the business sector.

By 2029, the total U.S. economy would be 17% larger than today under our estimate for potential growth, versus 13% larger under the current consensus estimate of 2.2% potential growth.

When considering downside risks, the potential economic growth rate could run closer to 2.5% per annum by the end of the decade, although 3% could be achievable. While 2.5% is lower than what was experienced in the 1990s and the early years of the 21st century, it is stronger than the potential growth rates of the post-financial crisis period (~1.8%).

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