Lower Measured Productivity = Lower Potential GDP

GS recently reduced their estimate of US trend productivity growth (growth in non-farm business output per hour) from 2% to 1½%, citing a smaller contribution from the IT sector as a reason.


Here, labour productivity growth can be divided into: (1) the contribution from growth in capital services, (2) the contribution from changes in labour composition, and (3) growth in total factor productivity (residual component).


Putting aside the issue of measurement and cyclicality for the moment, the TFP trend looks lower as well.


In addition, the projection for growth in potential hours worked will probably be lower than the population growth. GS estimates that potential labour force growth will average about 0.5 percentage point over the next ten years, similar to CBO’s assessment.

Sluggish rate of productivity growth, lower TFP trend and labour force growth lower than population growth, all lead to a GS revised potential GDP growth estimate of 1¾%, half a point below their prior estimate.


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