The new normal for long-run U.S. economic growth could be 1.5 percent to 1.75 percent a year, a major slowdown from the 1990s and early 2000s as an aging population, more gradual gains in education and weak productivity growth take their toll.
In a new paper, Federal Reserve Bank of San Francisco economist John Fernald takes a stab at projecting the future normal rate of growth given long-term trends in the economy. The historically slow pace he comes up with would have major implications for America’s future prosperity.
With slower economic growth, worker wages and living standards would improve more slowly than in the past, and business sales would grow more slowly.
Fiscal policy makers would be held back by more modest growth in tax revenue, and monetary policy makers would face a lower neutral rate of interest — the one that neither stimulates nor stokes the economy — meaning less room to cut rates to spur the economy in the event of a crisis.