As each generation comes of age, parents hope for a better life for their children, including a brighter financial future.
Some economists have expressed concern that the Great Recession of 2007-09 could result in lower long-run living standards and fewer opportunities for future generations. But while economic growth over the decades to come is likely to be slower than it has been in the past, the outlook for the U.S. economy remains bright.
Just as we have a higher standard of living than our parents, enjoying new and innovative goods and services that enrich our lives, our children will have a higher standard of living than we do, and their children will have an even higher standard of living.
Over a year or two what matters most for economic growth is the business cycle: the pattern of expansion, recession and recovery that the economy regularly goes through. But over the longer run there are two factors that account for almost all of economic growth:
Labor force growth has slowed in the United States over the past few decades, for two reasons. First, as the baby boomers have retired, there have been fewer younger people to replace them in the labor force, because American women, on average, have been having fewer children.
The U.S. fertility rate (births per woman) has declined from 3.68 in 1957 to 1.89 in 2013. Second, the big increase in women entering the workforce has run its course.
The share of women ages 16 and over that were in the labor force rose rapidly from 34 percent in 1948 to 59 percent in 2008, before falling slightly to 57 percent in 2014.
Due to these two trends, the number of new workers entering the labor force has slowed from 2.4 million annually in the 1970s to 340,000 annually so far this decade. Some of the weakness over the past few years is due to hangover from the Great Recession, but even so, the labor force will grow at a slower rate over the next few decades than it did in the decades after World War II, by about 1.4 million workers annually, absent a major policy shift allowing more immigration.
The trend for productivity is not as clear. Productivity growth has slowed from the 1950s and ‘60s, but that was likely inevitable given the unique advantages that the U.S. economy enjoyed coming out of World War II.
But productivity growth in recent years has been close to its average since the 1970s. Technological advances, business investment, and a more skilled and highly educated workforce have all supported productivity growth in the past, and will continue to support it going forward.
It could be that productivity growth is even stronger than the U.S. government is reporting; the government may not be able to fully account for some advances in technology, such as the increasing sophistication of smart phones. It is productivity growth—more efficient workers producing more and better goods and services—that allows us to boost our standard of living over time.
Assuming that labor force growth slows somewhat over the long run, but that productivity growth remains near its recent pace of 1.5 percent, PNC is forecasting long-run annual economic growth of 2.3 percent over the next three decades. This is below its average over the last 60 years of 3.1 percent, and slightly below its average over the last 30 years of 2.7 percent, but well above the average over the past decade of 1.6 percent, a period that, admittedly, includes the steepest economic downturn since the Great Depression.
Economic growth of 2.3 percent per year is more than enough to support a higher standard of living for our children over time. The Census Bureau projects average annual population growth of 0.6 percent per year over the next three decades, and with the economy expected to grow roughly four times faster, all Americans will benefit.
There are legitimate concerns about how economic growth is distributed in the United States. But just as innovations such as the Internet, personal computers, and new medical technologies have made our lives better and our lifespans longer than those of our parents and grandparents, our children and grandchildren will benefit from new discoveries that will make their lives better and healthier.
Gus Faucher, senior economist, PNC
Each individual measures standard of living differently, but to many people it includes a good job, affordable housing, access to quality healthcare and educational opportunities for their children and grandchildren.
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