Economic Report of the President 1994 - The American Presidency ...

A second risk is that long-term interest rates could take backmore of their declines of 1993. Such a move could crimp the interest-sensitivesectors that provided the economy with most of itsgrowth in 1993. Housing and business fixed investment would likelybe the most vulnerable sectors.A stalling out of consumer demand cannot be ruled out either.Consumers have been increasing their spending by a larger percentagethan their incomes have been rising over the past year,and they could turn pessimistic about the future again. Indeed,they have already done so several times in this business cycle expansion.An unexpected cutback in consumer spending would leadto higher than desired inventory levels, which would in turn reverberateback through the economy in the form of lower orders andperhaps lower employment in manufacturing.But economic growth could also exceed this forecast in the shortrun. The U.S. output gap widened sharply over the 1990-91 recession,and the economy could grow faster than its noninflationarypotential for a couple of years as part of a catchup process. Certainlygrowth of 4 percent would not be unprecedented during sucha phase. Among the factors that might contribute to faster than expectedgrowth are a faster than expected rebound of economicgrowth in Europe, Japan, and the rest of the industrial world,which would sharply boost U.S. exports; oil prices remaining relativelylow and giving a healthy boost to real disposable incomes;and the possibility that Americans have more pent-up demandthan realized for houses, automobiles, and other durable goods.SOURCES OF LONG-RUN GROWTHThe long-run rate of real GDP growth can be expressed as thesum of the individual growth rates of four components: (1) thenumber of available workers in the economy (the labor force); (2)the rate at which these workers are employed (the employmentrate); (3) the number of hours worked per year (which is proportionalto the average workweek); and (4) the quantity of goods andservices produced by an hour of labor (labor productivity). Table 2-3 details the contribution of each of these components to real GDPgrowth over several historical time periods and as projected for therest of the decade. Because many of these components vary withthe business cycle, their growth rates are measured from cyclicalpeak to cyclical peak. Estimates in the fourth column are based onactual data through the fourth quarter of 1993 and forecasts by theAdministration through 1999.The projected growth of nonfarm business product from the businesscycle peak in the third quarter of 1990 to the end of 1999 is2.7 percent per year. Underlying this projection is a growth in outputper hour of 1.5 percent per year and growth in hours of 1.2 per-151-444 0 - 9 4 - 493