Portfolio > Investment VIPs

Arnott's Firm: U.S. GDP Estimates Way Off: 1% Growth Is New Normal

Your article was successfully shared with the contacts you provided.

Unless the U.S. makes politically difficult changes in immigration, employment and investment policies, Americans should expect a long-term “new normal” rate of growth of just 1%. So says investment management firm Research Affiliates, in a research note that brings a wealth of demographic and historic data to bear on current fiscal projections.

Christopher Brightman, the report’s author and head of investment management for the Newport Beach, Calif. Firm founded by indexing guru Rob Arnott, is critical of White House and Congressional Budget Office growth projections that assume 2.5% long-term growth.

Indeed, Brightman views the White House’s higher, 4% growth assumption for its proposed recovery years of 2014 to 2017 as rosy scenarios of the sort Ronald Reagan’s budget director David Stockman derided in the 1980s after leaving the administration.

Brightman argues the U.S. will find it nearly impossible to recapture the 3.3% average annual growth that prevailed from 1951 to 2000 as a result of negative trends in the key areas that affect GDP: population growth, employment rate growth and productivity.

Citing, and critiquing, Census Bureau data, the Research Affiliates paper forecasts population growth to slow to 0.7% going forward, or half the prevailing rates of the latter half of the 20th century. The Census Bureau, in its low immigration (i.e., worst-case scenario), expects the population growth rate to decline to 0.8%.

But Brightman points out that we have yet to see the full effects of the Great Recession, noting that the Great Depression cut a previous 1.5% rate of population growth of the first decades of the 20th century down to 0.7%.

Preliminary figures from the Centers for Disease Control on births and fertility are in line with the notion that we will again see a population growth plunge: 2011 births were 1% less than in 2010, and the fertility rate has “declined to the lowest rate ever reported for the United States,” Brightman quotes the CDC as saying.

Immigration figures are also starkly negative. A Pew report on Mexican immigrants shows that 3 million Mexicans moved to the U.S. from 1995 to 2000 while 700,000 moved from the U.S. back to Mexico. In contrast, just 1.4 million Mexicans entered the U.S. from 2005 to 2010, and the same number returned home in those years.

When it comes to employment levels – currently 58% (in 2010) compared with a rate of 64% in 2000 – demographic headwinds are greater reason for concern than any temporary recession-based effects. Brightman notes that the over-55 proportion of the population was just 18% in the 1970s, but has quickly risen to 25% today and is expected to rise to 31% by 2030.

That means the total employment rate is going down, and Brightman says current trends are sufficient to shave off 0.2% per year in GDP growth “over the next two decades as boomers move into their retirement years.” He adds that while long-term population growth rates are speculative, the near-term figures he bases his projections on are “highly reliable” since we can closely estimate next year’s batch of 65-year-olds based on this year’s number of 64-year-olds.

The demographic effects of an aging population also has a direct effect on productivity – another key contributor to GDP – since Americans’ contributions to GDP peak in their 40s and then start to decline in their 50s and 60s.

America’s debt problems are also adversely affecting productivity, the Research Affilliates report shows.

“Borrowing to invest can raise our future productivity growth, but only if the return on capital exceeds the cost of debt,” Brightman writes.  But since America’s deepening debt has fueled consumption rather than investment, he argues that “reported GDP over recent decades overstates both our true prosperity and our true growth.”

Brightman estimates productivity growth of just 0.5% over the next several decades, consistent with forecasts of Robert Gordon, “perhaps the world’s foremost expert on productivity growth.”

That 0.5% in productivity growth together with projected employment growth of 0.5%, along with stagnating population growth, leads Brightman to expect 1% GDP growth as the new normal.

Brightman proposes policy fixes for our problems, but laments that while they may economically sensible they are not politically feasible in the current environment.

“Immigration reform, while politically difficult, could help slow the decline in population growth. We can increase the rate of employment by revising our transfer payment policies to provide ample incentives for employers to employ and for the labor force to seek employment. We can boost productivity by changing our tax policy to encour­age savings and investment, rather than printing money to support debt-financed consumption,” Brightman writes.

Brightman says we can live with slower growth, noting that the 3% annual GDP growth we enjoyed from 1950 to 2000 was historically exceptional. But he warns that rosy scenario forecasts that fuel false expectations of old-normal growth pose economic and political dangers in the years ahead.


Check out Jeremy Grantham: Growth as We Knew It ‘Gone Forever’ at AdvisorOne.