WACO, Texas – The national economy continues to improve. Although there is still much uncertainty which is curtailing economic performance, there have been notable indications the economy has regained some momentum and should gain ground through the rest of the year.
As noted in last week’s column, the United States finally reached employment levels not seen since prior to the recession (although the job situation still varies greatly by state).
I recently completed my latest long-term forecast for the US economy. While there are some risks (most notably major escalation in one of the several tense situations around the globe), The Perryman Group’s projections call for a return to stronger economic expansion over the forecast horizon. Here is a quick look at some of the primary patterns driving future performance, as well as a summary of my growth expectations.
The aging of the U.S. population will be a major force of change in the decades to come. Although unemployment, underemployment, and long-term unemployment remain problems in much of the United States, underlying demographic patterns are working in the opposite direction and the problem in the future will likely be worker shortages.
The key factor in the overall aging of the U.S. population is the baby boom generation, which includes persons born between about 1946 and 1964. The oldest began reaching retirement age in 2011, and the peak years with the largest numbers of baby boomers reaching 65 will be in approximately ten years. There will be millions of jobs to fill, and it may be difficult to find qualified workers. In addition, the older population will be expanding rapidly in a relatively short period of time, leading to substantial challenges for social services (such as Social Security and Medicare) and health care.
It will become increasingly important to ensure that the coming smaller workforce is well equipped to be productive through improving education. It is also essential that innovation and technological change continue to enable success.
Another development with long-term potential is the dramatic resurgence of the oil industry over the past few years (as I’ve mentioned in previous columns). Production levels have reached totals not seen since the late 1980s and continue to increase. In 2012, total US production was almost 2.4 billion barrels, with 2013 rising to more than 2.7 billion. While the United States still relies on imports to meet about 40 percent of crude oil needs, the increase in domestic supplies has helped reduce dependency on foreign oil and improve our trade situation.
The oil surge has been important to the economic recovery from the recent recession. Although direct employment in the industry is a small percentage of total jobs, the work is often well paying. Moreover, the ripple effects through the economy of this high value-added industry are large.
Three primary factors determine future oil and gas production: prices, geology, and the technology available for exploration and recovery. Technology has already played a major role in increased production, with the development of hydraulic fracturing and other innovative recovery methods unlocking oil and natural gas from shale plays.
The negative effects of the recent downturn in the U.S. housing market are finally beginning to resolve, though the recovery from the recession has been difficult and there is still a long way to go in many areas. Much like the employment situation, the housing market recovery varies depending on location across the country, and some regions will require years to work through oversupplies and price declines.
Homeownership in the first quarter was at a seasonally adjusted rate of 65 percent, the lowest level in 19 years. Most new households are renting despite the drop in home values; factors in the decision to rent include debt (such as student loans), stricter requirements for down payments from many lenders, and recognition of the potential for home price volatility. Over time, housing markets will adjust, but homeownership may stay at relatively low levels for an extended period of time.
While a variety of factors will affect ultimate economic performance in the coming decades, many of which are not foreseeable and may not even exist at present, I think the national economy will return to a healthier growth pattern in the years to come. I am projecting compound annual growth of about 3.2 percent for real gross product (RGP) through 2040, a rate which would see RGP expand from an estimated $14.6 trillion in 2013 to $34.2 trillion. Expected employment growth of just under 1.4 percent per year over the period would lead to an addition of almost 60 million jobs in the United States.
While the development of the nation’s oil and gas resources will continue to lead to a substantial economic stimulus over an extended period of time, the aging of the population will present notable long-term challenges. On balance, I am expecting relatively healthy growth through 2040, although there will doubtless be business cycles in intervening years.
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.