Analysts at Deutsche Bank suggest that for the US economy to expand at a 2%-plus rate this year and next, which is their forecast, the recent improvement in productivity growth will need to be sustained.
“Productivity has increased 1.2% over the last four quarters, which is twice its trailing five-year annualized growth rate. Productivity growth has been abysmal. According to our calculations, the recent trend in productivity is the second worst on record, eclipsed only by the ﬁve years ending in 1982, which contained data points from the stagﬂation period of the late 1970s. In the long run, real GDP growth can be thought of as the sum of productivity growth and labor force growth. With the latter slowing as the labor market approaches full employment, the former will need to improve further for inﬂation-adjusted output to upshift from its lackluster 2.1% trend growth rate in the current business cycle.”
“The primary driver of productivity growth is capital spending net of depreciation, which is essentially the growth rate of the economy’s capital stock. The mild ﬁrming in the growth rate of the economy’s capital stock, which began in 2013 and improved further in 2015—the data are released by the Bureau of Economic Analysis with a multi-year lag—is showing up in faster productivity growth today. This trend should continue based on the improvement in nonresidential ﬁxed investment, which is the primary input for estimating the growth rate of the capital stock.”
“With respect to the near-term outlook for business spending, we will closely monitor the trends in the future capital expenditures (capex) series within the Philadelphia Fed and New York Fed Empire surveys. The six-month outlooks for capex in these two regional surveys had foreshadowed the recent rebound in nonresidential ﬁxed investment over the last couple of quarters. If these series remain ﬁrmly in positive territory, it would point to further capital deepening, which over time should result in greater productivity gains and higher real GDP growth.”
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