ECONOMIC REPORT OF THE PRESIDENT

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C H A P T E R 2 <strong>THE</strong> YEAR IN REVIEW AND <strong>THE</strong> YEARS AHEAD The U.S. economy continued to grow in 2016, as the recovery extended into its seventh year with strong gains in employment and real wages, low inflation, and moderate output growth. Robust employment growth and moderate output growth imply low labor productivity growth, an important challenge in the years ahead. Strong employment gains along with rising real wages in 2016 were a continuation of the trends in 2015 that helped contribute to the fastest real median income growth on record and, in conjunction, a falling poverty rate. Real gross domestic product (GDP) increased at an annual rate of 1.8 percent during the first three quarters of 2016 (the latest data available as this Report goes to press), down slightly from the 1.9-percent growth during the four quarters of 2015.1 During the first three quarters of 2016, real consumer spending, which grew at an annual rate of 2.9 percent, exceeded real GDP growth as personal saving rates fell. Residential investment contributed positively to overall real GDP growth in the last quarter of 2015 and the first quarter of 2016, but subtracted from growth in the second and third quarters of 2016. The weakness in residential investment is surprising given the solid fundamentals: low mortgage interest rates, favorable demographic trends, rising real wages, and rising house prices. Business fixed investment contracted in the last quarter of 2015 and the first quarter of 2016, but has since returned to contributing positively, though weakly, to overall growth. Inventory investment—one of the most volatile components of GDP—subtracted from GDP during the five quarters prior to 2016:Q3, in particular in 2016:Q2, before rebounding in the third quarter. Net exports contributed positively to growth in each of the first three quarters of 2016 after subtracting from growth in in the four quarters of 2014 and 2015. Government 1 The 2017 Economic Report of the President only discusses the first three quarters of GDP and employment gains through November. It was finalized in December: only the second estimate of 2016:Q3 GDP and the November employment report had been released. Previous Economic Reports of the President were finalized in February. 65
purchases have been roughly neutral in their effect on overall GDP during the first three quarters of 2016. The economy added 2.3 million jobs during the 12 months ended in November 2016, extending the streak of consecutive months of positive nonfarm employment growth to 74 months. During the 12 months ended in November 2016, nonfarm job growth has averaged 188,000 a month, a somewhat more moderate pace than during 2014 and 2015, but similar to the strong pace during 2011-13. The unemployment rate was down 0.4 percentage point during the 12 months ended in November to 4.6 percent (Figure 2-1). The labor force participation rate during the 12 months ended in November 2016 averaged 0.14 percentage point higher than its 2015 average as the labor market continued to strengthen. The labor force participation rate had been falling since 2008 due to the aging of the population into retirement, cyclical factors, and other long-term trends, but it has rebounded slightly to its 2014 level as the strengthening labor market offset some demographic trends. Inflation remained low with consumer price inflation, as measured by the consumer price index (CPI), at only 1.6 percent over the 12 months ended in October 2016. Low energy prices continue to restrain overall inflation. The core CPI, which excludes food and energy, increased 2.1 percent over the 12 months ended in October. Over the same period, core personal consumption expenditure (PCE) inflation increased 1.7 percent, remaining below the Federal Reserve’s 2-percent target for overall PCE inflation. Real average hourly earnings of production and nonsupervisory workers rose 0.9 percent over the 12 months ended in October, as nominal wage growth continued to exceed the subdued pace of price inflation, building upon the 2.2-percent gain experienced during 2015 (Figure 2-2). Real median household income increased 5.2 percent in 2015, the fastest growth on record. Households at all income percentiles reported by the Census Bureau saw real gains in income, with the largest gains among households at the bottom of the income distribution. Challenges remain for 2017 and the longer term, including uncertain prospects for global growth, the low rate of productivity growth, and constraints posed by slowing trend growth in the labor force due to demographic shifts. The economic recovery that continued in 2016 has been characterized by a robust labor market but modest output growth. The labor market continued to strengthen and, by November 2016, the unemployment rate had fallen to half its peak in October 2009, but the 1.6-percent real output growth during the four quarters ended in 2016:Q3, was slower than its pace in recent years. The dissonance between the robust labor market and moderate output 66 | Chapter 2
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ECONOMIC REPORT OF THE PRESIDENT To
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C O N T E N T S ECONOMIC REPORT OF
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economic report of the president To
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eforms in history. Banks have sharp
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the annual report of the council of
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C O N T E N T S CHAPTER 1: EIGHT YE
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. THE ECONOMIC RATIONALE FOR FEDERA
Page 20 and 21: 2.4. Government Purchases as Share
Page 22 and 23: 4.iii. Premium for the Benchmark Pl
Page 24 and 25: 6.18. Systemic Risk (SRISK) 2005-20
Page 26 and 27: C H A P T E R 1 EIGHT YEARS OF RECO
Page 28 and 29: Figure 1-1 Actual and Consensus For
Page 30 and 31: Figure 1-3 Real Hourly Wage Growth
Page 32 and 33: Figure 1-4 Real GDP per Capita: Eur
Page 34 and 35: Figure 1-6 Household Net Worth in t
Page 36 and 37: Figure 1-8 Global Trade Flows in th
Page 38 and 39: Subsequent revisions to fourth-quar
Page 40 and 41: Percent 6 Figure 1-9 Fiscal Expansi
Page 42 and 43: substantial costs to the Federal Go
Page 44 and 45: worked to promote innovation and in
Page 46 and 47: expansion, a period of low producti
Page 48 and 49: The 2017 Economic Report of the Pre
Page 50 and 51: Chapter 4: Reforming the Health Car
Page 52 and 53: to the ACA and other factors. The A
Page 54 and 55: than 98 percent of Americans should
Page 56 and 57: Figure 1-13 Borrowers in Income Dri
Page 58 and 59: success of the financial rescue and
Page 60 and 61: einforced U.S. leadership in the ru
Page 62 and 63: Partnership (OGP), a global partner
Page 64 and 65: Figure 1-16 Labor Productivity Grow
Page 66 and 67: Labor Force Participation Household
Page 68 and 69: number of steps to ensure that econ
Page 72 and 73: Percent 11 Figure 2-1 Unemployment
Page 74 and 75: allowing for additional investments
Page 76 and 77: Percentage Point 0.6 0.4 Figure 2-3
Page 78 and 79: public, largely highway constructio
Page 80 and 81: The size of the Federal Reserve’s
Page 82 and 83: Figure 2-5 Private-Sector Payroll E
Page 84 and 85: fell 80 percent from September 2014
Page 86 and 87: Figure 2-8 Rates of Part-Time Work,
Page 88 and 89: Figure 2-v Prime-Age Male Labor For
Page 90 and 91: Output Real GDP grew 1.6 percent ov
Page 92 and 93: Figure 2-11 Compensation and Consum
Page 94 and 95: Table 2-i Optimal Weighting for Hou
Page 96 and 97: esults suggest that, to a first app
Page 98 and 99: Figure 2-viii Real GDP, Average and
Page 100 and 101: Figure 2-13 Consumer Sentiment and
Page 102 and 103: Figure 2-xi Household Debt Service,
Page 104 and 105: Ratio to Annual DPI 1.10 1.05 Figur
Page 106 and 107: Figure 2-17 National House Price In
Page 108 and 109: Index 220 Figure 2-19 Housing Affor
Page 110 and 111: Figure 2-21 Composition of Growth i
Page 112 and 113: Figure 2-23 Capital Services per Un
Page 114 and 115: Box 2-7: Explanations for the Recen
Page 116 and 117: Figure 2-xv Business Fixed Investme
Page 118 and 119: Figure 2-26 Foreign Real GDP and U.
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somewhat generalizable (Box 2-8), b
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prices weakened and the global econ
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inadequate demand has contributed t
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Figure 2-31 Nominal Wage Inflation
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Figure 2-33 Real Hourly Wage Growth
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Index 6 Figure 2-36 Financial Condi
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Percent 4.0 Figure 2-38 Nominal Lon
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Dollars per Barrel 80 Figure 2-40 B
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Figure 2-41 IMF World Real GDP Grow
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against the Mexican peso, the Chine
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United Kingdom It has been a turbul
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for example, Japan has grown almost
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Figure 2-45 Credit to Nonfinancial
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Meanwhile, core inflation (excludin
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kept rates low across a wide range
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Investments in surface transportati
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Table 2-2 Supply-Side Components of
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Conclusion The economy continued to
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not increased from 1973 to 2013, in
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developments; individual behavior;
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action affecting income inequality
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have occurred. In doing so, these p
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Percent 24 21 18 15 12 9 6 African
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without the policy response.5 These
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Box 3-2: Income Inequality and the
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unable to obtain insurance at any p
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Figure 3-7B Percent 50 Uninsured Ra
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and have not expanded Medicaid foun
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Box 3-3: Safety Net Policies as Ins
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Millions of People 18 Figure 3-8 Im
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Figure 3-9 Effective Tax Rates for
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Box 3-4: Additional Actions to Make
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$294 million in newly appropriated
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15 10 5 0 -5 -10 -15 Figure 3-12 Pe
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Administration with those of previo
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as a share of potential GDP by Pres
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Figure 3-17 Changes in the Distribu
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30 25 20 15 10 5 0 Single Source: C
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ate on capital gains and dividends
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C H A P T E R 4 REFORMING THE HEALT
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eneficiaries have received cumulati
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form of lower premium costs and ind
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Percent 25 20 Creation of Medicare
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Figure 4-3 Health Insurance Coverag
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90 80 70 60 50 40 30 20 10 0 25 55
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Percent Uninsured 25 CHIP Created 2
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Legislative actions subsequent to C
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Percent Uninsured 40 35 Figure 4-7
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ecause of the ACA’s provision all
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Box 4-2: Dynamics in the Individual
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projected during the debate over th
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whelming majority of Marketplace en
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Figure 4-v Change in Benchmark Prem
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20 Figure 4-10 Share of Workers in
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percent during the decade preceding
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Panel A: Share with a Personal Doct
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Box 4-3: Interpreting Results from
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Fortunately, the OHIE is not the on
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Figure 4-14 Uncompensated Care as a
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Figure 4-15 Uninsured Rate by Popul
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Figure 4-17 Monthly Gain in Private
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Change in Working-Age Employment to
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this cross-sectional relationship b
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ecent discussions of macroeconomic
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Figure 4-23 Life Expectancy at Birt
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Figure 4-24 Mortality Rate vs. Medi
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more to cover Medicare patients tha
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example, through CMMI, the Administ
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orient payment around the entirety
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Percent of Payments 60 Figure 4-26
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covered under ACO contracts at the
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Additional Steps to Reform the Heal
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legislation that overrides the reco
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Figure 4-28 Health Care Price Infla
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Figure 4-30 Trends in Real Prices f
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average growth rate of real per enr
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Figure 4-34 Growth in Real Costs fo
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made a large, readily quantifiable
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in states experiencing weaker and s
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distribution, holding fixed both sp
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individuals among individuals 65 an
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Figure 4-40 Average Real Deductible
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Figure 4-41 Real Per-Enrollee Presc
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educe the growth rate of Medicare s
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improvements will strengthen ACOs
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-5 0 -2 Figure 4-42 Cumulative Perc
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Woolhandler 2015). These analysts a
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productivity on the job. These bene
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Figure 4-46 Premiums and Cost Shari
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(KFF 2016). Another fifth of tradit
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2030 2028 2026 2024 2022 2020 2018
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C H A P T E R 5 INVESTING IN HIGHER
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Gainful Employment regulations. To
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Thousands of 2015 Dollars 900 800 7
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externalities, credit constraints,
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Figure 5-4 Earnings by Age and Educ
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Figure 5-5 Variation in Earnings by
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Box 5-1: Anti-Poverty Efforts and E
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careers. Some of the effects of the
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eligibility cutoff likewise finds s
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Box 5-2: Federal Investments in K-1
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Evaluations of early local Promise
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America’s College Promise Playboo
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Dollars 45,000 40,000 35,000 30,000
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pre-payment penalty. Second, by tyi
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equirements, pushed efforts associa
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Figure 5-16 Size of Outstanding Loa
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Figure 5-17 Average Monthly Payment
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Figure 5-18 Distribution of Key Out
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Figure 5-20 Earnings by Family Inco
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to student needs and improve test s
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Box 5-5: Making Sure Students Enter
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prior, the early FAFSA reform helps
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Figure 5-ii Number of Institutions
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Figure 5-23 Gainful Employment Earn
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Additionally, Pell Grants can be be
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C H A P T E R 6 STRENGTHENING THE F
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with no easy way to get the funds f
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public has limited information, run
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value added of the sector has gradu
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managers. Thus, after fees, savers
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Too Many Resources in Finance? Beyo
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of the firm after the purchase affe
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Percent 100 Figure 6-2 Mortgage Ori
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Figure 6-4 Case-Shiller Home Price
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Figure 6-7 Global OTC Derivative Ma
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consumer and investor protections.
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Figure 6-iv Top 5 Banks as Share of
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cult to replace with services from
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Are U.S. Banks Too Big? The questio
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The three federal banking agencies
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Risk Taking The Dodd-Frank Act took
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Box 6-3: The Performance of Communi
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Figure 6-ix Return on Assets of Ban
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egulators can take a more holistic
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Figure 6-13 Repo and Reverse Repo,
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Figure 6-15 Private Funds Reporting
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Days 60 Figure 6-16 Weighted-Averag
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Figure 6-18 Systemic Risk (SRISK),
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In the absence of another financial
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lower funding costs in 2007-09, “
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through the Dodd-Frank Act and othe
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Prior to the financial crisis, one
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asis.24 One of the advantages of ce
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findings from the NRSRO examination
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Prior to the crisis, enforcement of
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Box 6-5: Addressing the Problem of
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Table 6-i Sources of Investment Adv
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financial system and the systems of
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Box 6-6: The JOBS Act While it was
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Figure 6-23 S&P 500, 2003-2016 Inde
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Figure 6-27 Mortgage Delinquency an
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It created the FSOC to consider ris
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energy efficient and lower greenhou
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of domestic actions to reduce green
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people and vegetation (U.S. Global
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investment are much higher than the
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Delaying Action on Climate Change I
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uses and land management activities
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Carbon Pollution Standards for Powe
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a projected range of $16 billion to
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these resulted in insignificant cha
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Figure 7-4 Corporate Average Fuel E
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diesel fuel and jet fuel. The Vehic
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Box 7-3: Building Resilience to Cur
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sources in the oil and gas sector,
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emissions and total greenhouse gas
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Figure 7-7 Energy Intensity of Real
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Figure 7-10 U.S. Petroleum Consumpt
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Figure 7-12 Energy Intensity Transp
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Figure 7-14c Energy Intensity Comme
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Figure 7-16 U.S. Energy Consumption
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2008 to 7 percent in 2015. Figure 7
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Index, 2008 =0 0.1 0.0 -0.1 Figure
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Figure 7-23 Decomposition of Emissi
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three determinants of emissions? If
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Percent 100 80 Figure 7-26 Sectoral
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characteristics, and management tre
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oil and gas sector) were subsequent
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while creating new jobs and raising
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such as using similar methodologies
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Box 7-4: Supporting Increased Penet
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sector, the fee would incentivize p
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to be used to decompose emissions i
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Reinvestment Act.” NBER Working P
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D’Amico, Stefania, et al. 2012.
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______. 2016. “Chapter 3: Develop
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Chetty, Raj, et al. 2014. “Where
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NBER Working Paper 22170. Cambridge
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American Hospital Association and H
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Cantor, Joel C., et al. 2012. “Ea
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______. 2012a. “Direct Spending a
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Dranove, David, Craig Garthwaite, a
Page 509 and 510:
Wars: Global Solutions for Developi
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Huang, Jidong, and Frank J. Chaloup
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McWilliams, J. Michael. 2016. “Ch
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Pinkovskiy, Maxim. 2014. “The Imp
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______. 2016. “Certification of M
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Arcidiacono, Peter, V. Joseph Hotz,
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Bulman, George, and Caroline Hoxby.
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______. 2015a. “Economic Costs of
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Dobbie, Will, and Roland G. Fryer J
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Committee on Health, Education, Lab
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Jepsen, Christopher, Kenneth Troske
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Marcotte, Dave E., et al. 2005. “
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Reynolds, Arthur J., et al. 2011.
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Chapter 6 Acharya, Viral. V., Deniz
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Fama, Eugene F., and Kenneth R. Fre
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Wheelock, David C., and Paul W. Wil
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______. 2016a. “The Economics of
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______. 2016c. Short Term Energy Ou
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Interagency Working Group on the So
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Office of Management and Budget (OM
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A P P E N D I X A REPORT TO THE PRE
Page 553 and 554:
Council Members and Their Dates of
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Report to the President on the Acti
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consulting with a wide variety of o
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In October, the Council released a
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Research Economists David Boddy . .
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A P P E N D I X B STATISTICAL TABLE
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GOVERNMENT FINANCE, INTEREST RATES,
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Year or quarter Table B-1. Percent
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Table B-2. Gross domestic product,
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Table B-3. Quantity and price index
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Table B-5. Real exports and imports
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Year Total Table B-7. Real farm inc
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Table B-9. Median money income (in
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Labor Market Indicators Table B-11.
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Year or month Table B-12. Civilian
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Table B-14. Employees on nonagricul
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Year or month Table B-15. Hours and
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Government Finance, Interest Rates,
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Table B-19. Federal receipts and ou
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Table B-21. Federal and State and l
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Table B-23. U.S. Treasury securitie
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Year and month Bills (at auction) 1
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Year and month Table B-26. Money st
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