United States: With the policy status quo, 2017 looks a lot like prior years Global Economic Outlook, Q3 2017

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Healthy employment growth and moderate increases in GDP continue to define the US economy, even as the composition of the labor force evolves. But domestic demand is only part of the growth equation.

Introduction

Growth in the first half of 2017 is currently estimated to be 1.0 percent, just below the average rate of growth seen over the last five years (2.2 percent).1 Concurrently, the labor market continues to strengthen, with the average pace of job growth over the first six months of 2017 only slightly lower than last year’s pace (on average 180,000 jobs per month in 2017 compared with 187,000 for all of 2016) and the unemployment rate hovering at very low levels (4.4 percent in June).2 Even one of the areas of greatest concern, the labor force participation rate, has stabilized.

As the recession began in December 2007, the labor force participation rate began a decline that continued long after the official conclusion of the recession in June 2009 (figure 1). However, after reaching a low of 62.4 percent in September 2015—a rate not seen in almost 40 years—the labor force participation rate rose slightly and has averaged 62.7 percent over the last 24 months. While a decline from approximately 66 percent before the recession to just under 63 percent currently may not appear on the surface to be that large, each 0.1 percentage point change to the labor force participation rate represents around 250,000 potential workers, given the current size of the population.3

Labor force participation rate

A changed labor force

Part of the labor force decline is due to an aging of the workforce. When calculating the labor force rate, there is a lower age limit of 16 years for the denominator (civilian population), but there is no upper limit. However, as shown in table 1, the decline in overall labor force participation is not just a story of an aging population; labor force participation has declined among the lower-age cohorts and the largest group, the prime-age workforce (ages 25–54). The declines are evident for both males and females.

Labor force participation by age and sex, 2007 and 2017

The decline in the participation rates of the younger groups is positive news because it has been coupled with increases in high school and college participation and completion. In the 2006–07 academic year, the average freshman high school graduation rate was 73.9 percent. By the 2013–14 academic year (the latest available data), that proportion had risen to 81.9 percent.4 Further, the proportion of recent high school graduates, defined as individuals aged 16 to 24 who graduated from high school or received an equivalent certificate, currently enrolled in two- or four-year colleges increased from 67.2 percent in 2007 to 69.2 percent in 2015.5 However, for some of those young people who have entered the labor force, the news is not good. The unemployment rate for 16- to 19-year-olds is currently 13.3 percent, and the unemployment rate for 20- to 24-year-olds is 7.3 percent.6

The decline in the participation rates of the younger groups is positive news because it has been coupled with increases in high school and college participation and completion.

The decline in the participation among the 24- to 54-year-olds could be more problematic, because this is when people should be accumulating assets to fund their retirements. Estimates show that Americans, in general, are not saving enough for retirement. For example, the Federal Reserve Board’s Survey of Consumer Finance found that in 2007, only 65.4 percent of households headed by someone in the 45 to 54 age range had at least one retirement account, and that the median value of the retirement accounts for those who did have accounts was only $63,000. By 2013 (the latest data available), the proportion of 45- to 54-year-olds with a retirement account had dropped to 56.5 percent, although the median value of these accounts for those who had one rose to $87,200.7

Employment trends for the two oldest cohorts shown in table 1 show a different trend: Participation in these two groups has been rising, with the increases being particularly pronounced in the 65 and older group. The reasons for this trend is likely a combination of a growing number of healthy individuals who want to keep working and a lack of retirement resources, which puts complete retirement out of the reach of many.

The net result of these shifts in participation and changes in the underlying age demographics of the US economy is a workforce that is older. Currently, 17.0 percent of those employed are between the ages of 55 and 64, up from 13.8 percent just 20 years ago; and 6.0 percent are age 65 and older, up from 3.8 percent over the same period (table 2). These differences are similar across the sexes and are projected to increase in the future.8

Labor force by age and sex, 2007 and 2017

Missing growth factor: Exports

An outcome of the lower labor force participation of the 25- to 54-year-old cohort, in particular, is likely to be slower growth in personal consumption expenditure. The extra investment that the younger two groups are making in education will provide some offset, but an aging population with reduced retirement income expectations will definitely create a headwind going forward. So where might the United States look for growth? One possibility is exports.

During the latter part of the last recovery, exports provided a substantial boost to US GDP. Even after the current recovery finally took hold in a meaningful way, the contribution of exports was lower, before dropping away to almost nothing. As shown in figure 2, exports contributed 0.85 percentage points to GDP during the last years of the 2001 recession’s recovery period. As the economy began to normalize post the Great Recession, the contribution from exports dropped to 0.6 percentage points (2011 to 2014). During the two most recent years, 2015 and 2016, exports contribution was near zero.

Exports contribution to GDP, 2000 to 2016

Suppressing growth in US exports have been slow world growth and the high value of the US dollar. Fortunately, we are seeing some improvement on both fronts. Figure 3 shows that world growth during the current recovery has been not only subdued but, in fact, deteriorating. However, according to the International Monetary Fund’s most recent projections, “Global economic activity is picking up, with a long-awaited cyclical recovery in investment, manufacturing, and trade. World growth is expected to rise from 3.1 percent in 2016 to 3.5 percent in 2017 and 3.6 percent in 2018.”9

World GDP growth

The trade-weighted value of the US dollar has also backed away from its recent highs. While still at very high levels, it is trending down from its most recent peak in December 2016 (figure 4). Exporters will be at least somewhat cheered that their competitiveness on the world stage is not getting worse.

Trade-weighted value of the US dollar

Exporters will be at least somewhat cheered that their competitiveness on the world stage is not getting worse.

As we wait to see if stronger world growth materializes and what will happen to future demand for dollars, there are several policy discussions underway in Washington that could have a material effect on either or both of these situations. However, until details are developed and agreed upon around taxes, trade, and budget (to name just a few of the possible policy changes that could occur), we are not at a point where it would be useful even to speculate on how the US economy might be impacted.