Economic growth
The AEO economic forecasts are trend projections, with no major shocks assumed and with potential growth determined by the economy’s supply capability. Growth in aggregate supply depends on increases in the labor force, growth of capital stocks, and improvements in productivity. Long-term demand growth depends on labor force growth, income growth, and population growth. The AEO2015 Reference case uses the U.S. Census Bureau’s December 2012 middle population projection: U.S. population grows at an average annual rate of 0.7%, real GDP at 2.4%, labor force at 0.6%, and nonfarm labor productivity at 2.0% from 2013 to 2040.
Table 2 compares key long-run economic growth projections in AEO2015 with actual growth rates over the past 30 years. In the AEO2015 Reference case, U.S. real GDP grows at an average annual rate of 2.4% from 2013 to 2040—a rate that is 0.4 percentage points slower than the average over the past 30 years. GDP expands in the Reference case by 3.1% in 2015, 2.5% in 2016, 2.6% from 2015 to 2025, and 2.4% from 2015 to 2040. As a share of GDP, consumption expenditures account for more than two-thirds of total GDP. In terms of growth, it is exports and business fixed investment that contribute the most to GDP. Growth in these is relatively strong during the first 10 years of the projection and then moderates for the remaining years. The growth rates for both exports and business fixed investment are above the rate of GDP growth with exports dominating throughout the projection (Figure 1).
| AEO2015 (2013-40) | Previous 30 years | |
|---|---|---|
| Real 2009 dollars (annual average percent change) | ||
| GDP | 2.4 | 2.8 |
| GDP oer capita | 1.7 | 1.8 |
| Disposable income | 2.5 | 2.9 |
| Consumer spending | 2.4 | 3.1 |
| Private investment | 3.0 | 3.5 |
| Exports | 4.9 | 6.1 |
| Imports | 4.0 | 6.0 |
| Government expenditures | 0.9 | 1.7 |
| GDP: Major trading countries | 1.9 | 2.4 |
| GDP: Other trading countries | 3.8 | 4.7 |
| Average annual rate | ||
| Federal funds rate | 3.2 | 4.5 |
| Unemployment rate | 5.3 | 6.3 |
| Nonfarm business output per hour |
2.0 | 2.0 |
| Source: AEO2015 Reference case D021915a, based on IHS Global Insight T301114.wf1. AEO2015 National Energy Modeling System, run REF2015.D021915A. |
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In the AEO2015 Reference case, nominal interest rates over the 2013-40 period are generally lower than those observed for the preceding 30 years, based on an expectation of lower inflation rates in the projection period. At present, the term structure of interest rates is still at the lowest level seen over the past 40 years. In 2012, the federal funds rate averaged 0.1%. Longer-term nominal interest rates are projected to average around 6.0%, which is lower than the previous 30- year average of 7.8%. After 2015, interest rates in ensuing five-year periods through 2040 are expected to stabilize at a slightly higher level than the five-year averages through 2013, 2014, and 2015, as the result of a modest inflation rate.
Appreciation in the U.S. dollar exchange rate dampens export growth during the first five years of the projections; however, the dollar is expected to depreciate relative to the currencies of major U.S. trading partners after 2020, which combined with modest growth in unit labor costs stimulates U.S. export growth toward the end of the projection, eventually improving the U.S. current account balance. Real exports of goods and services grow at an average annual rate of 4.9%—and real imports of goods and services grow at an average annual rate of 4.0%—from 2013 to 2040 in the Reference case. The inflation rate, as measured by growth in the Consumer Price Index (CPI), averages 2.0% from 2013 to 2040 in the Reference case, compared with the average annual CPI inflation rate of 2.9% from 1983 to 2013.
Annual growth in total gross output of all goods and services, which includes both final and intermediate products, averages 1.9%/year from 2013 to 2040, with growth in the service sector (1.9%/year) just below manufacturing growth (2.0%/year) over the long term. In 2040, the manufacturing share of total gross output (17%) rises slightly above the 2013 level (16%) in the AEO2015 Reference case.
Total industrial production (which includes manufacturing, construction, agriculture, and mining) grows by 1.8%/year from 2013 to 2040 in the AEO2015 Reference case, with slower growth in key manufacturing industries, such as paper, primary metals, and aspects of chemicals excluding the plastic resin and pharmaceutical industries. Except for trade of industrial supplies, which mostly affect energy-intensive industries, net exports show weak growth until 2020. After 2020, export growth recovers as the dollar begins to depreciate and the economic growth of trading partners continues. Net export growth is strongest from the late 2020s through 2034 and declines from 2035 to 2040.
Updated information on how industries supply other industries and meet the demand of different types of GDP expenditures has influenced certain industrial projections.[14] For example, as a result of a better understanding of how the pulp and paper industry supplies other industries, trade of consumer goods and industrial supplies has a greater effect on production in the pulp and paper industry. Nonenergy-intensive manufacturing industries show higher growth than total industrial production, primarily as a result of growth in metal-based durables (Figure 2).
In the AEO2015 Reference case, manufacturing output goes through two distinct growth periods, with the clearest difference between periods seen in the energy-intensive industries. Stronger growth in U.S. manufacturing through 2025 results in part from increased shale gas production, which affects U.S. competitiveness and also results in higher GDP growth early in the projection period. In the Reference case, manufacturing output grows at an average annual rate of 2.3% from 2013 to 2025. After 2025, growth slows to 1.7% as a result of increased foreign competition and rising energy prices, with energy-intensive, trade-exposed industries showing the largest drop in growth. The energy-intensive industries grow at average rates of 1.8%/year from 2013 to 2025 and 0.7%/year from 2025 to 2040. Growth rates in the sector are uneven, with pulp and paper output decreasing at an average annual rate of 0.1% and the cement industry growing at an average annual rate of 3.1% from 2013 to 2040.
AEO2015 presents three economic growth cases: Reference, High, and Low. The High Economic Growth case assumes higher growth and lower inflation, compared with the Reference case, and the Low Economic Growth case assumes lower growth and higher inflation. Differences among the Reference, High Economic Growth, and Low Economic Growth cases reflect different expectations for growth in population (specifically, net immigration), labor force, capital stock, and productivity, which are above trend in the High Economic Growth case and below trend in the Low Economic Growth case. The average annual growth rate for real GDP from 2013 to 2040 in the Reference case is 2.4%, compared with 2.9% in the High Economic Growth case and 1.8% in the Low Economic Growth case.
In the High Economic Growth case, with greater productivity gains and a larger labor force, the U.S. economy expands by 4.1% in 2015, 3.6% in 2016, 3.2% from 2015 to 2025, and 2.9% from 2015 to 2040. In the Low Economic Growth case, the current economic recovery (which is now more than five years old) stalls in the near term, and productivity and labor force growth are weak in the long term. As a result, economic growth averages 2.4% in 2015, 1.6% in 2016, 1.7% from 2015 to 2025, and 1.8% from 2015 to 2040 in the Low Economic Growth case (Table 3).
| 2015 | 2016 | 2015-25 | 2015-40 | |
|---|---|---|---|---|
| Productivity | ||||
| High Economic Growth | 2.3 | 2.3 | 2.4 | 2.3 |
| Reference | 1.9 | 1.6 | 2.1 | 2.0 |
| Low Economic Growth | 1.3 | 0.9 | 1.7 | 1.6 |
| Non-farm employment | ||||
| High Economic Growth | 2.9 | 1.9 | 1.2 | 0.9 |
| Reference | 2.2 | 1.6 | 0.8 | 0.7 |
| Low Economic Growth | 1.6 | 1.1 | 0.6 | 0.5 |
| Real personal income | ||||
| High Economic Growth | 3.6 | 3.3 | 3.4 | 2.8 |
| Reference | 3.3 | 2.8 | 2.8 | 2.5 |
| Low Economic Growth | 2.7 | 2.4 | 2.4 | 2.3 |
| Real personal consumption | ||||
| High Economic Growth | 3.6 | 3.5 | 3.2 | 2.9 |
| Reference | 3.0 | 3.0 | 2.5 | 2.4 |
| Low Economic Growth | 2.5 | 2.6 | 1.7 | 1.7 |
Source: AEO2015 Reference case D021915a, based on IHS Global Insight T301114.wf1. |
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Endnotes
- The Industrial Output Model of the NEMS Macroeconomic Activity Module now uses the Bureau of Economic Analysis detailed input-output (IO) matrices for 2007 rather than 2002 (http://bea.gov/industry/io_annual.htm) and also now incorporates information from the aggregate IO matrices (http://bea.gov/industry/gdpbyind_data.htm).