The Economist: The long-term outlook for the US economy
By Ray Perryman
Aug. 3, 2013 at 3:03 a.m.
The U.S. economy has been improving for almost four years, though at a relatively sluggish pace. Since our last comprehensive long-term forecast a year ago, hiring has picked up to some extent, and the housing market has begun to come back in most parts of the country.
In addition, there are several trends positively affecting growth prospects, including the development of large new sources of oil and natural gas and the potential for immigration reform.
Balanced against these expansionary influences are several risk factors, including uncertainties related to domestic policy as well as international concerns. First, the good news.
Since the downturn, the housing market has been a major constraint on growth in most parts of the country, with a large backlog of houses for sale, high numbers of foreclosures and depressed prices.
Recent data indicates that prices are once again trending upward, however, and construction is adding to business activity in many regions. Real estate cycles are normal for any economy, but the extreme down market of recent years has finally yielded to a more healthy and sustainable pattern.
Oil production and exploration activity are on an upswing, with new recovery methods allowing for economically feasible drilling within shale formations.
The economic benefits of this increase in exploration and production are massive, including tens of thousands of high-paying jobs across the U.S.
In addition, this new production capacity helps the nation move closer to the goal of energy security as domestic sources of oil and natural gas help insulate the U.S. from potential price shocks stemming from international events.
As we have discussed in prior columns, efforts to make immigration laws more rational and reasonable have surfaced, and it appears that major reform may finally be taking place.
About 16 percent of workers in the U.S. (25 million people) in 2012 were foreign born according, to the Bureau of Labor Statistics. Certain industries also rely heavily on immigrants.
Current immigration laws are outdated and convoluted, but as we go to press, it appears that reform is feasible, although significant hurdles remain. Even if this effort is unsuccessful, it helps pave the way for future change.
The reform bill would provide a mechanism for illegal immigrants already in the United States to stay if they have a job and haven't committed a felony or three misdemeanors and pay a fine and back taxes.
Ultimately, permanent residency and then citizenship could be achieved for those who maintain a job. The bill also requires stepping up border security. Foreign-born workers can enhance future prosperity, and a more rational set of immigration laws would be highly beneficial. The House of Representatives, however, may yet pose major obstacles.
One of the negative factors shaping our forecast is the U.S. fiscal situation. A last-minute deal regarding the fiscal cliff of 2012 failed to adequately deal with the sequester, and spending cuts are occurring across a number of government agencies. These cuts are reducing economic expansion, though their effects will take time for full realization.
While a more fiscally sustainable government is clearly desirable, the sequester is not an optimal method of achieving this goal, and long-term economic growth will be affected.
In addition, the large outstanding debt of the U.S. government is reaching levels where it could curtail future growth unless a workable solution to deficit spending is found.
Expansionary monetary policy by the Federal Reserve has enhanced recovery from the recent recession but must come to an end at some point to avoid inflationary risks.
Another domestic issue that impacts the willingness to take risk and expand employment and investment is the uncertainty of the cost associated with health care reform; recent modifications have relieved some immediate pressure but also added to the instability of expectations.
Debt problems continue for a number of European countries, and solutions will of necessity involve multinational agreements among Eurozone nations. Unsustainable fiscal policies will ultimately require change, but solutions will be difficult to achieve. Global economic performance will be affected by the financial situation in Europe.
Tensions in the Middle East have the potential to escalate, causing an increase in oil prices and otherwise curtailing global economic stability. Relatively healthy growth in China, though well below peak levels, and other developing economies has been crucial to global economic recovery.
Recently, there have been signs of slowing in some areas. Significant problems in China, which are a distinct possibility given current banking concerns, would dampen the overall global outlook given the size and scope of the Chinese economy.
Balancing these positive and risk factors, The Perryman Group's latest forecast indicates that the rate of growth is likely to increase (though business cycles are inevitable).
Through the long term, the U.S. economy will benefit from underlying strengths such as infrastructure and workforce capabilities, and moderate expansion is projected.
Over the 2012-40 forecast horizon, U.S. real gross product is projected to expand by 3.26 percent per annum to reach $33.34 trillion.
Employment is likely to total 195.88 million in 2040, up from an estimated 133.74 currently, representing a growth rate of 1.37 percent per year.
The U.S. economy continues to work through the effects of the recent recession. In addition, uncertainty stemming from policy issues - health care reform, in particular - is constraining hiring and investment.
Even so, conditions are improving, and long-term growth at a moderate pace is likely. Business cycles are inevitable, but The Perryman Group's long-term forecast indicates a decidedly upward trend.
M. Ray Perryman is president and chief executive officer of The Perryman Group (perrymangroup.com). He also serves as institute distinguished professor of economic theory and method at the International Institute for Advanced Studies.