It's becoming routine. The Federal Reserve Bank of Atlanta's researchers, like most economists, continue to expect gross domestic product (GDP) growth of a steady but unspectacular 2 percent for "as far as the eye can see."
So says Atlanta Fed research director Dave Altig. One thing would almost certainly give the economy extra juice: improved productivity growth. Labor productivity is the output of goods and services per hour of work across the economy. The pace of productivity growth slowed to about 1.25 percent a year over the past decade, versus more than 3 percent from the late 1990s through 2004 and more than 2 percent over the previous 30 years.
"The bottom line is, whatever the solution is to increasing productivity growth in the longer run is the solution to a faster pace of growth for the U.S. economy," Altig said during a recent Atlanta Fed ECONversations webcast.
Altig, executive vice president of the Atlanta Fed, was joined on the webcast by research economist and senior adviser John Robertson. Charles Davidson of the Atlanta Fed's Public Affairs department moderated the session.
Altig and Robertson discussed the state of the economy in the context of the Atlanta Fed's 2016 annual report, Recession to Recovery: A Decade in Perspective. The report summarizes the economy's cyclical rebound that has unfolded even as several longer-term, secular trends continue to restrain economic growth. Sluggish business investment, which is hindering growth in labor productivity, is among those secular forces.
On the other hand, GDP growth, while not robust by historical standards, has staged a cyclical comeback. The recession dented the nation's total output by more than $600 billion. But the economy as measured by GDP is now about $2 trillion higher than when the downturn began, adjusted for inflation, Altig notes. Likewise, employment and house prices, among other major indicators, have also rebounded.
"There was substantial recovery that took place," he said. "It just took a really long time."
Stimulating productivity likely the economic issue of the day
A key to strengthening flagging productivity growth, Robertson says, is capital investment by firms—buying bigger ovens, in informal economists' parlance. Upgraded technology, machinery, and equipment for workers to deploy is traditionally the primary engine of productivity growth.
"But the pace of investment during the last six years has been pretty weak on a historical basis," Robertson explained.
Productivity is critical to general well-being. If productivity increases 2 percent a year, the average American's standard of living will double roughly every 35 years, Fed Chair Janet Yellen said in a January speech. One percent annual growth means the standard of living doubles every 70 years.
Unlike productivity, employment has expanded nicely since the recession. Firms are hiring faster than they are building what economists call the "capital stock," or plant, equipment, and other assets. Thus, individual companies and the economy as a whole are not getting any productivity bang from bigger ovens because firms are still cooking with the same old ones.
The economy needs business investment especially now, Robertson said. The other usual source of productivity gains—expansion of the labor force—is largely missing and unlikely to return soon. Demographics, and in particular an aging population, is a powerful force working to limit growth of the labor force.
"We're looking for some turnaround in business investment as a key that's going to lift overall productivity," Robertson said, "because, longer term, we're not going to be able to rely on growth in the labor supply as the driver of output growth."
A few months ago, it appeared business investment might strengthen. Survey results showed optimism among businesspeople increased after the presidential election. But a surge in business investment has not materialized, Altig said.
Perhaps the lingering dip in capital expenditures was to be expected. After all, long recessions such as the 2007–09 downturn tend to be associated with tepid business investment, Altig said. "The longer the downturn takes hold, the farther you get behind, in some sense, in building capital to where it ought to be," he added, "and so the harder it will be to dig out of the hole."