E C O N O M I C R E P O R T O F T H E P R E S I D E N T

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The Outlook for ProductivityCan the factors that account for the more rapid pace of labor productivitygrowth since 1995 be sustained? The data provide a mixed but, on balance,positive picture.The trend toward a more educated work force seems likely to continue withsupport from the Administration’s policy of promoting investment in educationand job training. Moreover, the median age of the work force will continueto rise through at least 2008, when the leading edge of the baby-boom generationretires. But these trends are not expected to shift, and as a result, thecontribution of labor composition to productivity is not likely to change muchfrom its historical average of 0.3 percentage point per year.The decline in the relative price of computers has been particularly rapidover the past 4 years, and so it is prudent to expect that this rate will return toits long-term rate of about 20 percent per year. If that happens, computers’contribution to productivity growth will drop from about 0.4 to 0.3 percentagepoint per year.The growth rate of capital services per hour increased in 4 of the past 5 years,reaching 5.4 percent in 1999—a rate that implies a 2-percentage-point yearlycontribution of capital deepening to labor productivity growth. For 2000 thepace of capital deepening is likely to increase further, because the current levelof investment is already very high. (The rate of growth of capital servicesdepends on the level of investment.) Projections over the longer run are morespeculative, but the level of nominal investment is expected to remain high relativeto nominal output. The President’s budget proposal—in which the FederalGovernment continues to pay down the Federal debt—also promotes thisinvestment. This high-investment economy is likely to promote a continuedstrong pace of capital deepening and strong productivity growth.Besides the contributions of labor and capital, cyclical and other considerationsenter the productivity forecast. Most important, the level of productivityin 1999 was likely above its trend, as hiring probably has not caught up withthe surge in output, and many vacancies probably remain unfilled. A modelthat allows labor productivity to differ from its trend because of these cyclicalinfluences estimates the trend of labor productivity growth at a 1.8 percentannual rate since 1990, up from a 1.6 percent annual rate from the peak of theprevious business cycle to 1990. Simulations from this model overestimate thelevel of productivity from 1993 through 1997 and underestimate it thereafter.Although these errors may stem from the lack of a role for capital deepening inthe model, this omission has the offsetting benefit that the estimate of the longtermtrend in labor productivity is not overly sensitive to cyclical movements ininvestment spending.Second, the projection depends on the time horizon. A projection for thenear future extrapolates recent trends, whereas a projection for the distant84 | Economic Report of the President
future extrapolates long-term trends. Near-term projections ought to balancethe probable continued role of capital deepening in supporting strong productivitygrowth with the likelihood that a lot of job vacancies will be filled.Weighting these considerations, the Administration projects the trend rate ofincrease in labor productivity at 2.2 percent per year for 1999-2002, which isdown from the nearly 3 percent pace actually observed over the past few years.The projection of productivity growth then begins to fade toward its longtermrate, with growth of 2.0 percent for 2003-05 and then 1.8 percent for2006-10. Productivity over the entire 1999-2010 interval is projected to growat a 2.0 percent average annual rate.Supply-Side Components of GDPIn addition to productivity, the factors on the supply side whose effects onGDP growth sum to total GDP growth include population, the labor forceparticipation rate, the employment rate, the workweek, and the two additionalratios shown in Table 2-4. In line with the latest projection from theTABLE 2-4.—Accounting for Growth in Real GDP, 1960-2007[Average annual percent change]Item1960 Q2to1973 Q41973 Q4to1990 Q31990 Q3to1999 Q31999 Q3to2007 Q41) Civilian noninstitutional population aged 16 and over ...... 1.8 1.5 1.1 1.12) PLUS: Civilian labor force participation rate 1 ................ .2 .5 .0 .03) EQUALS: Civilian labor force 1 ............................................. 2.0 2.0 1.0 1.14) PLUS: Civilian employment rate 1 ................................... .0 -.1 .2 -.15) EQUALS: Civilian employment 1 ........................................... 2.0 1.9 1.2 1.06) PLUS: Nonfarm business employment asa share of civilian employment 1 2 ........................ .1 .1 .4 .27) EQUALS: Nonfarm business employment ............................ 2.1 2.0 1.6 1.28) PLUS: Average weekly hours (nonfarm business) .......... -.5 -.4 .1 .09) EQUALS: Hours of all persons (nonfarm business) ............. 1.6 1.7 1.7 1.210) PLUS: Output per hour (productivity, nonfarm business) 2.8 1.5 2.032.4 2.011) EQUALS: Nonfarm business output ..................................... 4.5 3.1 3.834.1 3.212) PLUS: Ratio of real GDP to nonfarm business output 4 .. -.3 -.2 -.53-.7 -.313) EQUALS: Real GDP ............................................................... 4.2 3.0 3.233.4 5 2.81 Adjusted for 1994 revision of the Current Population Survey.2 Line 6 translates the civilian employment growth rate into the nonfarm business employment growth rate.3 Income-side definition.4 Line 12 translates nonfarm business output back into output for all sectors (GDP), which includes the output offarms and general government.5 GDP growth is projected to fall below its underlying trend for this period (about 3 percent) as the employmentrate is projected to fall 0.1 percent per year over this period.Note.—Detail may not add to totals because of rounding.The periods 1960 Q2, 1973 Q4, and 1990 Q3 are business-cycle peaks.Sources: Council of Economic Advisers, Department of Commerce (Bureau of Economic Analysis), and Departmentof Labor (Bureau of Labor Statistics).Chapter 2 | 85
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E C O N O M I CR E P O R TO F T H E
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C O N T E N T SPageECONOMIC REPORT
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ECONOMIC REPORT OF THE PRESIDENTTo
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my State of the Union address, I pr
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hard-pressed families—with additi
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LETTER OF TRANSMITTALCOUNCIL OF ECO
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PageSources of Business Cycle Moder
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PageHeterogeneity in Abatement Bene
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Page2-3. Net Worth and the Personal
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PageLIST OF BOXES2-1. The CPI-U-RS,
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These successes notwithstanding, th
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$33,740, Americans today can acquir
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those in the highest decile rose 0.
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Data on poverty also show progress.
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Over the years, government support
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Page 33 and 34: The current expansion, by contrast,
Page 35 and 36: InflationAccelerating inflation pos
Page 37 and 38: it was argued, must be shifting the
Page 39 and 40: is that the direction of technologi
Page 41 and 42: Challenges for the FutureThis chapt
Page 43 and 44: in the new labor market. The chapte
Page 45 and 46: disruptive in some cases. Finally,
Page 47 and 48: C H A P T E R 2Macroeconomic Policy
Page 49 and 50: Chapter 2 | 51
Page 51 and 52: usiness cycle has changed over the
Page 53 and 54: cent over the four quarters of 1999
Page 55 and 56: framework that continues to pay dow
Page 57 and 58: The labor force participation rate
Page 59 and 60: Box 2-1.—continuedof no substitut
Page 61 and 62: feed directly into the index. Moreo
Page 63 and 64: funds rate (the interest rate that
Page 65 and 66: nesses with below-investment-grade
Page 67 and 68: From 1989 to 1999, corporate earnin
Page 69 and 70: ital includes the value of intellec
Page 71 and 72: of gross personal saving to GDP has
Page 73 and 74: The beginnings and ends of U.S. bus
Page 75 and 76: introduced in 1913 and Social Secur
Page 77 and 78: Of course, it is premature to decla
Page 79 and 80: Box 2-3.What Did We Learn from the
Page 81: TABLE 2-3.— Accounting for the Pr
Page 85 and 86: Over the past 6 years, the CPI-U-RS
Page 87 and 88: work enables job hunters to work wh
Page 89 and 90: Chart 2-17 shows how this could hap
Page 91 and 92: of professional economic forecaster
Page 93 and 94: Administration’s forecast is used
Page 95 and 96: Innovations during the 20th century
Page 97 and 98: transformations the Internet and e-
Page 99 and 100: Another industry that saw major cha
Page 101 and 102: One example is the “lean” produ
Page 103 and 104: Box 3-1. Measuring the Economy in a
Page 105 and 106: Box 3-2. Implementing Local Competi
Page 107 and 108: of fiber optic cable deployed by te
Page 109 and 110: How Information Technology IsChangi
Page 111 and 112: total investment in information tec
Page 113 and 114: For e-retailers, the Internet repla
Page 115 and 116: suppliers for surplus quantities of
Page 117 and 118: However, the same technology that d
Page 119 and 120: value of each network to its users.
Page 121 and 122: many possible uses but that depends
Page 123 and 124: Maintaining CompetitionAnother way
Page 125 and 126: Similarly, by reducing barriers to
Page 127 and 128: Formal education was a far less imp
Page 129 and 130: The Transformation of the Labor Mar
Page 131 and 132: Americans has risen almost 10-fold
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diploma (Chart 4-5). That same year
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ensuring equal opportunity for all
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those of men (again looking at full
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Box 4-1. The Role of Government Pol
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severe disabilities. For example, a
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Box 4-2.—continuedOther policy in
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equirements of jobs. To right this
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uild and maintain a world-class ele
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Class Size Reduction. Average class
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During this Administration, the Fed
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years ago. In 2000, 13.1 million st
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through a period of unpaid training
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The first major mandatory training
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a 30-year low, labor force particip
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ConclusionTwo key developments—th
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TABLE 5-1.—Contrasting American F
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opened up for women to work and as
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The increased prevalence of single-
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to an increasing share of the popul
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Box 5-1.—continuedAlthough most f
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For the past 50 years, the median i
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gle mothers the median rose from $1
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TABLE 5-3.— Share of Women with C
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income growth over the last 30 year
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consumption patterns have changed,
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Increases in the Minimum WageThe mi
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Box 5-4.The National Strategy to Re
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or older, and of those 85 or older,
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of single-parent families increased
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caregivers for the elderly say thei
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would allow all workers who get tim
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C H A P T E R 6Opportunity and Chal
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Meanwhile innovations in transporta
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But to look at U.S. trade only in t
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Data from the U.S. computer industr
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net indebtedness of about 18 percen
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capital flows. Coupled with other d
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forces to play themselves out. In t
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The Benefits of a Global EconomyThe
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Domestic production can expand when
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In short, increased globalization b
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key sectors such as finance, teleco
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international trade is not a zero-s
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As these data suggest, not all WTO
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For example, preferential U.S. trad
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By contrast, in 1998 output fell on
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Box 6-3.The New International Finan
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The key objective of the initiative
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Chapter 6 | 233
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demand for exports. It would be a m
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integrating with the world economy
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The past century of experience in a
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242 | Economic Report of the Presid
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Box 7-1.—continuedand energy pric
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Box 7-2.—continuedproviding usefu
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Incentive-Based Approaches to Addre
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compliance costs may fall by less t
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Box 7-4.—continuedroughly 5 to 15
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so a system of multipollutant tradi
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sulfur dioxide trading program. The
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coastal zone. Trades can occur with
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Permit Trading: Phasedown of Leaded
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To address the problems associated
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Box 7-5. Individual Quotas for Fish
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A landmark international agreement
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However, the country could cut ener
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Quantitative Restrictions on Tradin
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comprehensive domestic trading syst
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Box 7-9.—continuedthe use of ener
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C O N C L U S I O NA Century of Cha
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More than 40 percent of the work fo
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growth and are credited with helpin
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have much to gain from continuing t
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Appendix AREPORT TO THE PRESIDENT O
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Council Members and Their Dates of
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previously served as the New Centur
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(antidumping, countervailing duties
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with a number of developing countri
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Michael Treadway provided editorial
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Appendix BSTATISTICAL TABLES RELATI
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POPULATION, EMPLOYMENT, WAGES, AND
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AGRICULTURE:PageB-95. Farm income,
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NATIONAL INCOME OR EXPENDITURETABLE
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TABLE B-2.—Real gross domestic pr
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TABLE B-3.—Quantity and price ind
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TABLE B-5.—Contributions to perce
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TABLE B-6.—Chain-type quantity in
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TABLE B-7.—Chain-type price index
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TABLE B-8.—Gross domestic product
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Year orquarterGrossdomesticproductT
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TABLE B-12.—Gross product of nonf
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TABLE B-14.—Personal consumption
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TABLE B-16.—Private gross fixed i
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TABLE B-18.—Government consumptio
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TABLE B-20.—Private inventories a
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Year orquarterTABLE B-22.—Foreign
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TABLE B-24.—Relation of gross dom
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Year orquarterTABLE B-26.—Nationa
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TABLE B-27.—Sources of personal i
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TABLE B-28.—Disposition of person
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TABLE B-30.—Gross saving and inve
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TABLE B-31.—Median money income (
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TABLE B-33.—Civilian population a
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TABLE B-34.—Civilian employment a
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TABLE B-36.—Unemployment by demog
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TABLE B-38.—Civilian labor force
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TABLE B-40.—Civilian unemployment
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TABLE B-42.—Unemployment by durat
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TABLE B-44.—Employees on nonagric
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TABLE B-45.—Hours and earnings in
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Year orquarterOutput per hourof all
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PRODUCTION AND BUSINESS ACTIVITYTAB
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TABLE B-51.—Industrial production
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Year or monthTABLE B-53.—New cons
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TABLE B-55.—Manufacturing and tra
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Year or monthTotalTABLE B-57.—Man
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Year ormonthTABLE B-59.—Consumer
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TABLE B-60.—Consumer price indexe
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TABLE B-62.—Changes in consumer p
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TABLE B-63.—Producer price indexe
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TABLE B-65.—Producer price indexe
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TABLE B-66.—Changes in producer p
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TABLE B-68.—Components of money s
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TABLE B-69.—Aggregate reserves of
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Year andmonthBills(new issues) 13-m
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TABLE B-72.—Credit market borrowi
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TABLE B-73.—Mortgage debt outstan
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TABLE B-75.—Consumer credit outst
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TABLE B-77.—Federal budget receip
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TABLE B-79.—Federal receipts, out
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TABLE B-81.—Federal and State and
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TABLE B-83.—State and local gover
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TABLE B-85.—Interest-bearing publ
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End of monthTABLE B-87.—Estimated
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TABLE B-89.—Corporate profits by
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TABLE B-91.—Sales, profits, and s
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Year or monthTABLE B-93.—Common s
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AGRICULTURETABLE B-95.—Farm incom
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TABLE B-97.—Farm output and produ
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Year ormonthTABLE B-99.—Indexes o
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Year orquarterExportsINTERNATIONAL
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TABLE B-102.—U.S. international t
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TABLE B-104.—U.S. international t
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TABLE B-106.—Industrial productio
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PeriodTABLE B-108.—Foreign exchan
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TABLE B-110.—Growth rates in real
show all

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