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Dec 04 2015

The Fed is Coming to Terms with Slower Growth

The Fed has finally acknowledged what ECRI has been saying for several quarters, namely that the long-term decline in trend GDP growth is unlikely to go away. To wit, their latest meeting 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.”

Recall that ECRI addressed declining trend growth in the U.S. as early as 2008 – before the Lehman collapse – later showing that declining trend growth affects most developed economies. The weakness in trend GDP growth across these economies is explained by simple math as growth in output per hour and hours worked are the basis for real GDP growth. While growth in hours worked is determined by long-term demographic trends, and therefore unlikely to change, growth in labor productivity has the potential to shift around in the near term.

To consider the likelihood of an upswing anytime soon, we examined how the key sources of productivity growth in the G5 economies have changed over time. Our analysis reveals similarities across G5 economies that provide clues about the prospects for a productivity growth rebound going forward.

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