econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 22 November 2015

Flashback To "Simple Math: One Half Percent Plus One Half Percent Equals One Percent"

from Lakshman Achuthan, Co-Founder and Chief Operations Officer of ECRI

We welcome the Fed's recognition that the long-term decline in trend growth, that ECRI first identified before Lehman blew up, is not going away.

To wit, the Fed minutes state that "the equilibrium level of short-term real interest rates would likely remain low relative to estimates of its level before the financial crisis if trend growth of total factor productivity does not pick up and if demographic projections for slow growth in working-age populations are borne out."

This is in line with what we reiterated in June, namely, that "economic expansions have been weakening for decades due to the long-term decline in U.S. trend growth. ... [T]he GDP calculus is based on simple math; namely, growth in output per hour (i.e., labor productivity) plus growth in hours worked equals real GDP growth."

On a related note, the minutes go on to state that it would be prudent to haveadditional policy tools that could be used in such an environment. Specifically, the "equilibrium real rate ... currently is close to zero, notably below its historical average." But a "lower long-run [real interest rate] would also imply that the gap between the actual level of the federal funds rate and its near-zero effective lower bound would be smaller on average. A smaller gap might increase the frequency of episodes in which policymakers would not be able to reduce the federal funds rate enough to promote a strong economic recovery and rapid return to maximum employment or to maintain price stability in the aftermath of negative shocks to aggregate demand. Some participants noted that it would be prudent to have additional policy tools that could be used in such situations" (emphasis ours).

Now that the debate seems to be settling on the problem of long-term trend growth, perhaps it will move beyond stimulus-based shots at attaining "lift-off" toward how to improve productivity and demographics.

===

Original story from June 11, 2015 below:

Simple Math: ½% + ½% = 1%

Recoveries have been weakening due to declines in growth in output per hour (i.e., productivity), growth in hours worked, or both. Taken together, they add up to real GDP growth. It's just simple math.

For the past four years, productivity growth (green line) has averaged just over ½% per year (red line), leading Fed Vice Chairman Stanley Fischer to lament that it "has stayed way, way down." Given the latest data, one could say that the U.S. is in a "productivity recession," having seen the largest back-to-back quarterly productivity declines in 22 years.

It's often assumed that productivity growth will rebound to its post-World War II average - around 2¼% per year (gold line). But you know what they say about assumptions. To quote Fischer again, "productivity is extremely difficult to predict," and "will perhaps eventually return" to its earlier pace. In other words, there's no clear reason why that will happen anytime soon. Indeed, since the end of 2013, productivity growth has averaged minus 0.7% a year.

Potential labor force growth (blue line) should reflect the long-term trend in growth in hours worked. But the Congressional Budget Office says it will stay at½% per year at least for the next decade. This is pretty much set in stone, given the demographics.

Adding up the likely trend growth of these two measures - ½% for productivity plus ½% for hours worked - gives us just 1% longer-term real GDP growth.

So, unless there's good reason to believe that productivity growth will revive, trend GDP growth may very well stay stuck in the 1% range for years to come. If so, growth slowdowns could much more easily push growth below zero, leaving very little room for error. Is the Fed ready?

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Contributors


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Tax Reform: The Good, the Bad, and the Really Ugly, Part Three
A New Era of Central Banking?
News Blog
My Cat Is My Valentine - Furball Fables
17 February 2017: ECRI's WLI Growth Index Again Moderately Declines
Final February 2017 Michigan Consumer Sentiment Inches Up. Better Than Forecast
January 2017 Headline New Home Sales Significantly Improve But Below Expectations
Why The Proposed Border Tax Adjustment Is Unlikely To Promote U.S. Exports
Rail Week Ending 18 February 2017: Improvement Continues
Infographic Of The Day: Cannabis Law: The Past, Present And Future
Early Headlines: Asia Stocks, Dollar And Oil All Slip. Gold Steady, US Oil Exports Surge, Trump Backs Priv. Prisons, WH Hints Pot Crackdown, London Home Prices Slow, Trump Policies Will Help China And More
When Evidence Says No, But Doctors Say Yes
Pacific Rim States Affected By Trump's War On Free Trade
Real Paleo Diet: Early Hominids Ate Just About Everything
Amazon's Global Workforce Is Growing Rapidly
What We Read Today 23 February 2017
Investing Blog
Can You Spot Low Risk Entries?
Technical Thoughts: Trading, Luck Or Skill?
Opinion Blog
Fed Up: Culture Shock
Kenneth Arrow's Ignored Impossibility Theorem
Precious Metals Blog
Deflation And Gold: A Contrarian View
Live Markets
24Feb2017 Market Close: Wall Street Rose From Session Lows To Close In The Green Near The Unchanged Line, Short-Term Indicators And Analysts Questioning Continuing Bull Run
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government





























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved