ECONOMIC REPORT OF THE PRESIDENT

tends to grow faster in the nonfarm business sector than for the economy
as a whole, because productivity in the government and household sectors
of the economy is presumed (by a national-income accounting convention)
not to grow (that is, output in those two sectors grows only through the use
of more production inputs). The difference in these growth rates is expected
to subtract 0.3 percentage point a year during the 11-year projection period,
similar to the 0.2-percent-a-year decline during the long-term historical
interval (line 10, columns 1 and 2). This productivity differential is equal to
the sum of two other growth rates in the table: the ratio of nonfarm business
employment to household employment (line 4) and the ratio of real GDP to
nonfarm business output (line 7).
Summing the growth rates of all of its components, real GDP is projected
to rise at an average 2.2 percent a year over the projection period (line
8, column 2), the same as the annual growth rate for potential real GDP (line
9, column 2). Actual GDP is expected to grow faster than potential GDP only
in 2017 and 2018, and by a small margin that is invisible in the long-term
averages shown in the table.
As noted earlier, but shown in more detail in this table, real potential
GDP (line 9, column 2) is projected to grow more slowly than the long-term
historical growth rate of 3.1 percent a year (line 9, column 1), primarily due
to the lower projected growth rate of the working-age population and the
retirement of the baby-boom cohort.
Upside and Downside Forecast Risks
Like any forecast, the Administration’s economic forecast comes with
possible errors in either direction, and several are worth enumerating here.
One upside risk is from the homebuilding sector, which has some upside
potential given the current low level of homebuilding relative to historic
trends and its potential for increase. Additionally, labor force participation
could continue to grow as it has this year, after decades of decline in participation
among prime-age workers (Box 2-3). On the downside, it appears
that global growth may remain sluggish and global trade growth has slowed
dramatically, which may slow the growth of exports and investment. In
addition, financial market developments—either reflecting spillovers from
abroad or U.S.-specific issues—also pose downside risks. Over the longerrun,
there are some downside risks to the estimate of potential output
growth insofar as recent low productivity growth rates might continue.
148 | Chapter 2