Is The Economy That Weak?

First factor in the demographics

Recent sluggish business reports, combined with broad-based downward revisions of economic data, are fueling recessionary fears. But economists Roger E. Brinner and David S. Wyss of DRI/McGraw-Hill point out that such reports need to be interpreted in the context of a development that has received too little attention: a mild demographic slump that is affecting the U.S. and most other industrial nations.

In the 1970s, America's adult population expanded at close to a 2% annual rate and the labor force exploded at a 3% pace. By the first half of this decade, however, the 18-to-65-year-old contingent was growing at a scant 0.7% rate. And with labor-force participation by women finally leveling off, growth of the labor force had fallen to a 1.1% annual rate--a pace it is expected to maintain into the next century (chart).

Since economic growth over the long haul is determined by labor input plus productivity gains, the slowdown in growth of the labor force has inevitably lowered the speed at which the economy can expand. This is doubly true because government data revisions indicate that productivity growth in the expansion has averaged just 1.1% to 1.2% a year, far slower than in earlier expansions.

Even if productivity growth speeds up a bit, Brinner and Wyss contend that weak economic data need to be viewed more positively in light of the current demographic slump. Monthly gains of 100,000 jobs, they write, should be welcomed, not mourned. Such data "project not a temporary lull but sustainable growth for a long period."

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