Getting GDP Growth Above 3% Is Attainable

One component of the Trump administration policies is to improve the growth rate of the economy through an infrastructure spending policy, reducing taxes and regulations and increasing spending on rebuilding the military. While campaigning he stated his policies would return the economic growth rate, GDP, to 3%. A number of economists, along with the Federal Reserve, indicate moving the growth rate of the economy to 3% will be a difficult task. To put the 3% growth rate into perspective though, up until and through the financial crisis, the long run GDP growth rate was nearly 3.5%. Since the financial crisis though, the growth rate has averaged 1.8%.

The result of this slower pace of growth has been the creation of an output gap of about 15% or $3 trillion. This gap represents economic output that has been lost due to the economy growing below its long run trend rate and likely a partial cause of a lower employment participation rate.

The Bureau of Labor Statistics defines the participation rate as, "the percentage of the population that is either employed or unemployed (that is, either working or actively seeking work.)" Certainly the impact of baby boomer retirements is having some impact on the lower participation.

If the participation rate remained at its pre-financial crisis level, the unemployment rate would equal 9.2% versus the currently reported 4.7%. Some data does suggest the participation level should be higher and in fact the above chart shows the participation rate is increasing. As the next chart below shows, only the 55-year and over age group has a participation rate higher than where it stood pre-financial crisis.

The just noted review of the employment picture is important as economic growth can be approximated by adding together growth in the labor force to productivity. Fidelity recently released a paper noting the headwinds to economic growth caused by a maturing labor force and stagnant productivity growth. Below is a chart included in the report that shows the breakdown.

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