US GDP Growth: How much is possible?

President Trump and several of his cabinet members and advisors have stated that real US gross domestic product (GDP) growth of over 3 percent, and even 4 to 5 percent, is achievable. NEAM believes 3 percent growth is certainly possible but would be difficult to sustain without some very significant catalysts. We believe the 4 to 5 percent growth numbers bandied about during the campaign are mathematically infeasible when all relevant facts are taken into account.

To begin with, GDP growth can be reasonably approximated by summing the growth in the labour force and the growth in worker productivity. Historically, a ~1+ percent growth rate in our labour force, combined with productivity growth of ~2+ percent, have combined to create a real growth rate for the US economy (until fairly recently) of ~3.0 to 3.5 percent (Figure 1). This simple ‘rule of thumb’ has squared quite well with reported GDP growth since 1950, with few exceptions (Figure 2). In both of the decades in which the relationship deviated, economic shocks were involved (the Arab oil embargo of the 1970s and the ‘Great’ recession of 2008/2009) and resulted in extreme bear markets in equities. In any case, over long periods of time GDP growth equates directly to growth in the size and efficiency of the US labour pool.