Growth in GDP over the Long Term
The Administration projects that, following a slight pickup of growth from 2007 to 2008, real GDP will increase at a slowly diminishing rate from 2008 through 2012. Indeed, real GDP is projected to decelerate from a 3.1 percent rate of growth during the four quarters of 2008 to 2.9 percent by 2012. The average growth rate during this interval is roughly in line with the consensus of private forecasters for those years. After 2007, the year-by-year pace is close to the estimated growth rate of potential real GDP, a measure of the rate of growth of productive capacity. The unemployment rate is projected to edge up in 2007 (from its 4.5 percent level in the fourth quarter of 2006) and to plateau at 4.8 percent in 2008. As discussed below, potential GDP growth is expected to slow in the near term as productivity growth reverts toward its long-run trend (about 2.6 percent per year), and to slow further during the 2007-to- 2011 period as labor force growth declines due to the retirement of the baby-boom generation.
The growth rate of the economy over the long run is determined by its supply-side components, which include population, labor force participation, the ratio of nonfarm business employment to household employment, the length of the workweek, and labor productivity.
As can be seen in the fourth column of the table, the mix of supply-side factors determining real GDP growth has been unusual since the businesscycle peak at the beginning of 2001. The high rate of productivity growth has been partially offset by the decline in the participation rate and the workweek. Also notable is the large and puzzling decline in the ratio of nonfarm business employment to household employment. This unusual decline reflects the slow growth of employment as measured by the payroll survey (which asks employers to report the number of jobs) relative to the more rapid growth of employment as measured by the household survey (which estimates the number of employed persons through a sample of households). This disparity has been reduced somewhat by the just-issued benchmark revision to payroll employment, but has yet to be satisfactorily explained.
The participation rate fell, on net, from 2001 to 2006 (although it ticked up in 2006), and is projected to trend lower through 2012. The recent behavior stands in contrast to the long period of increase from 1960 through 1996. Looking ahead, the participation rate is projected to decline, reflecting the aging of the baby-boom cohorts, leading to more retirements and a likely increase in the share of people on disability pensions.