1 Economic Research Global Data Watch November 12, 2021 JPMorgan Chase Bank NA Jesse Edgerton (1-212) 834-9543 jesse.edgerton@jpmchase.com Michael Feroli (1-212) 834-5523 michael.e.feroli@jpmorgan.com Economic Research Note US: Population slowdown threatens trend growth Three million fewer immigrants have reduced popula- tion growth, and aging boomers will keep retiring We put trend labor force growth at only 0.1% per year After a pandemic-induced jump in productivity, we doubt that rapid productivity growth will persist Risks to our estimate of 1.5% potential GDP growth look tilted to the downside Before the pandemic, our estimate of potential, or trend, GDP growth stood at a rather subdued 1.5% per year. As with so many other aspects of the economy, data relating to the sup- ply side of the economy became volatile, polluted, and noisy during the pandemic. While the dust has not fully settled, the early picture that is emerging on post-pandemic potential GDP growth suggests that trend growth remains stuck in the slow lane. While we are staying with our prior estimate of 1.5%, the risks look tilted to the downside. The pandemic- related increases in efficiency (of which there appear to be many) have more likely shifted up the level of productivity, rather than increased trend productivity growth . Moreover, an increase in trend labor productivity growth is needed just to offset the slowing trend in labor supply growth. Since our last update, trend growth in effective labor supply has stepped down 0.3%-pt to just 0.1% per year. To achieve 1.5% trend growth requires total economy productivity growth of 1.4%, or nonfarm business productivity growth of 1.9%—a pace barely eclipsed in the very high productivity growth 1990s expansion. Potential, or trend, GDP growth is often defined as the rate of economic growth that puts neither upward nor downward pressure on measures of resource utilization such as the un- employment rate. While business cycle fluctuations around this trend dominate the attention of financial market pundits, it is trend growth that determines the long-run growth in liv- ing standards (and that influences the direction of neutral in- terest rates). Actual GDP growth can grow well above this trend—as it has this year and is expected to next year—but as the economy gets closer to full employment potential GDP growth imposes a speed limit on the economy. The drivers of potential growth are usually decomposed into the sum of growth of labor supply and growth of labor productivity (or said another way, growth in hours worked and growth in output per hour worked). Our discussion begins with labor sup- ply. Since this depends importantly on slow-moving demo- graphic forces, these estimates are on somewhat firmer ground. We then turn to the more conjectural estimates of trend produc- tivity. While there are some evocative stories about why productivity is entering a new golden era, the hard data on productivity drivers early in the post-pandemic era point to a continuation of subdued trends in productivity growth. A late-cycle labor force letdown In the years since we last updated our views on potential GDP growth, population growth has disappointed relative to fore- casts. In 2017, the Census Bureau projected that the working- age population, which we define here as those aged 16 to 64, would continue growing, albeit at slower rates than in the past. Current population estimates, however, show that the working-age population peaked in 2019 and has been falling for almost two years (Figure 1). The Census Bureau now es- timates that the working-age population in 2021 is about 2.5 million below expectations as of 2017. Tragically, the Centers for Disease control estimates that about 180,000 Americans under age 64 have died from COVID-19, and a jump in overdose deaths since the begin- ning of the pandemic appears to have contributed about an- other 50,000 deaths. But the vast majority of the shortfall in working-age population growth appears driven by a decline in immigration to the United States, beginning during the Trump administration and continuing through the COVID pandemic. 190000 195000 200000 205000 210000 215000 05 08 11 14 17 20 Annual estimate of resident population Census Bureau 2017 projection Monthly estimate of civilian population 000s Figure 1: Population aged 16 to 64 and projections Source: Census Bureau, BLS, J.P. Morgan This document is being provided for the exclusive use of JENNA MERCHANT at JPMorgan Chase & Co. and clients of J.P. Morgan. 2 Economic Research US: Population slowdown threatens trend growth November 12, 2021 JPMorgan Chase Bank NA Jesse Edgerton (1-212) 834-9543 jesse.edgerton@jpmchase.com Michael Feroli (1-212) 834-5523 michael.e.feroli@jpmorgan.com The Census Bureau estimates that the contribution of net in- ternational migration to US population growth was about 1.07 million in 2016, before falling steadily to 0.48 million by 2020. Cumulative net international migration from 2017 to 2020 has been about 2.1 million below what would have oc- curred if pre-2017 trends in annual inflows had continued (Figure 2). If we extrapolate the data into 2021, we estimate that the US population is missing about 3 million recent im- migrants relative to pre-2017 trends, a large majority of whom would have been of working age. Beyond the drop in population growth, the COVID-19 pan- demic and recession also drove a sharp drop in labor force participation across all age groups, with the labor force still down by about 3 million relative to pre-COVID levels and by about 6 million relative to pre-COVID trends. Notably, about an extra 1.7 million people say they have retired (Figure 3). Digging a bit deeper into these data, we find that the increase in retirements have been most pronounced among those 65 years or older (Figure 4). So we see little sign that the jump in retirements has been driven by early retirees that might easily be drawn back by a tight labor market. We thus think that COVID has accelerated some retirements that would have happened in the coming years as population aging continues to pull down the labor force participation rate (Figure 5). Looking ahead, there are ample reasons for pessimism around the rate of potential labor force growth. Immigration rates could eventually rebound, but we suspect this will be a slow process. Meanwhile, the resident population will continue aging. We suspect that the working-age population of 16-64- year-olds in the US will stay about flat in the next two years, which would be a slight pickup from the last two years, but still a dramatically smaller contribution to trend growth than in decades past (Figure 6). If labor force participation rates stays constant within age groups, the overall labor force par- ticipation rate would fall by about 0.3%-pt per year, and the labor force would grow just 0.1% per year, making a rather dismal contribution to potential GDP growth. 0.00 0.25 0.50 0.75 1.00 1.25 1.50 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 millions per year Figure 2: Contribution of international migration to population growth Source: Census Bureau, J.P. Morgan Actual Pre-2017 trend Shortfall: 2.1 million 15 16 17 18 19 20 33 37 41 45 49 53 2005 2008 2011 2014 2017 2020 millions, sa Figure 3: Population not in labor force: retired percentage, sa Source: IPUMS, CPS, J.P. Morgan Total population retired Percent population retired 54 56 58 60 62 64 66 24 26 28 30 32 34 2005 2008 2011 2014 2017 2020 % Figure 4: Share of population that is retired, by age group % Source: IPUMS, CPS, J.P. Morgan 65-69 years 60-64 years 60 61 62 63 64 65 66 67 68 97 00 03 06 09 12 15 18 21 % Figure 5: Labor force participation rate and demographics Source: BLS, J.P. Morgan. Orange line fixes LFPR for age-gender groups at pre-GFC levels. Effect of population aging Labor force participation rate -0.5 0.0 0.5 1.0 1.5 2.0 60 65 70 75 80 85 90 95 00 05 10 15 20 Resident population Census Bureau 2017 projection %oya Figure 6: Population aged 16 to 64: growth rate Source: Census Bureau, J.P. Morgan This document is being provided for the exclusive use of JENNA MERCHANT at JPMorgan Chase & Co. and clients of J.P. Morgan. 3 Economic Research Global Data Watch November 12, 2021 JPMorgan Chase Bank NA Jesse Edgerton (1-212) 834-9543 jesse.edgerton@jpmchase.com Michael Feroli (1-212) 834-5523 michael.e.feroli@jpmorgan.com We should note, though, that the pre-COVID experience demonstrated that a tight labor market can produce significant cyclical gains in labor force participation, and, in fact, our forecast looks for well-above-trend labor force growth near 1% in the coming years. A pandemic-era productivity pickup The other key input into thinking about trend growth in the economy’s productive potential is productivity, or output per hour worked. The disappointing performance of the economy in the last expansion was the result of slow productivity growth. The cyclical behavior of the economy—as proxied by the change in the unemployment rate—was actually rather respectable. Even the non-demographically-determined aspect of labor supply, labor force participation, eventually beat late- cycle expectations. But productivity in the nonfarm business sector expanded at only a 1.1% annual pace, half the 2.2% rate seen in the 1990s expansion (Figure 7). Among the many disruptions wrought by the pandemic era was the possibility that the economy was shaking itself out of the malaise of slow productivity growth. Nonfarm productivi- ty growth popped to a decade-high 4.1% in the year ending in 1Q21. As we have moved into the post-pandemic (or endem- ic) era, productivity growth has slowed, and over the four quarters ending in 3Q21 has declined 0.5%. Our discussion of trend productivity growth looks back at the pandemic and forward to the new era. In looking back at the surprisingly strong productivity growth in the first year of the COVID-19 era, it is natural to start with pandemic-related explanations for this phenomenon. To take one example, the forced experiment of widespread working- from-home may have helped to overcome a coordination problem that prevented smaller-scale experimentation with different work arrangements. In a widely-cited report, a group of prominent academic economists concluded that the lasting shift to WFH arrangements will lead to a roughly 1% increase in the level of measured productivity (and a much greater in- crease in non-measured productivity, due to reduced commut- ing times). The industries with the greatest use of WFH arrangements are finance and professional & business services. The industry- level productivity data released so far do not point to these industries leading the way since the pandemic. Instead, somewhat surprisingly, we see in Figure 8 that retail was one of the productivity outperformers last year (and this is not merely a compositional issue of more retail moving to the somewhat-higher-productivity online segment). Though it’s tempting to believe that the economy-wide bump in productivity augured a new era of higher productivity growth, it is helpful to recall that productivity growth often reaches its cycle high during a recession or very early in the expansion (Figure 7 again). This is particularly true of more recent business cycles, and is consistent with the finding that productivity growth has recently become more counter- cyclical. The reasons for this given at the time of the 2001 and 2008 recessions are very similar to the one given for the latest cycle. And they all echoed the Austrian economist Joseph Schumpeter’s saying that “a depression for capitalism is like a good, cold [shower].” Firms use downturns to wrench out inefficiencies. Given the experience of the past few cycles, there is a good chance the bump up in the level of productivity will persist. There is still an open question as to whether growth in productivity will increase as well. To look at that we disen- tangle some of the drivers of productivity growth in the next section. Looking under the hood Productivity, as mentioned earlier, is defined as output per hour worked. One relatively straightforward way to increase labor productivity is to give workers more capital with which to do their jobs. The standard textbook example is increasing productivity by upgrading from a shovel to a backhoe. A more updated example would be giving workers more band- -5 0 5 10 15 00 05 10 15 20 %ch Figure 7: Nonfarm productivity growth Source: BLS Over year-ago q/q, saar -5 0 5 10 00 05 10 15 20 %ch Figure 8: Industry productivity growth Source: BLS Manufacturing Retail This document is being provided for the exclusive use of JENNA MERCHANT at JPMorgan Chase & Co. and clients of J.P. Morgan. 4 Economic Research US: Population slowdown threatens trend growth November 12, 2021 JPMorgan Chase Bank NA Jesse Edgerton (1-212) 834-9543 jesse.edgerton@jpmchase.com Michael Feroli (1-212) 834-5523 michael.e.feroli@jpmorgan.com width or processor speed. In the first few quarters of the cur- rent recovery business capital spending made up some of the ground lost during the recession. More recently, however, that recovery has slowed to levels where it has yet to catch up to the pre-recession trend (Figure 9). The pre-recession trend in capital spending is not a particular- ly impressive standard. The deepening in the capital stock available to workers in the last decade was the slowest in the post-war period, and the current expansion is getting off to a similar start (Figure 10). If capital deepening in this cycle is similar to that experienced in the last cycle, then this alone is reason to remain cautious on the prospects for trend produc- tivity growth. One argument for stronger capital spending is firming in wage growth leading to capital-labor substitution. But capital prices are also firming; the 4.2% annualized increase in 3Q21 was the strongest in over a decade. And a tighter labor market could also lead to higher interest rates, increasing the user cost of capital. Late-cycle dynamics are not necessarily conducive to an investment boom. Another surefire way to make workers more productive is to equip them with more skills—either through experience or formal education. This growth in “human capital” was a sig- nificant contribution to productivity in the 80s and 90s as av- erage education levels increased (Figure 11). This contribu- tion also has a significant business cycle component to it: dur- ing downturns, less skilled, less educated workers tend to be the first that are cut, increasing the average level of human capital in the remaining workforce. This phenomenon was particularly acute in the COVID-19 recession. This tends to obscure somewhat the secular trend in human capital growth, but in the 2010s expansion this contribution to productivity growth stepped down, and given recent trends in education is likely to remain on the more subdued recent track. The residual productivity that remains after accounting for workers gaining more physical and human capital is called total factor productivity (TFP), or productivity after account- ing for these observable factors of production. This concept, TFP, is sometimes equated with technology, though in fact it captures everything that isn’t measured by the variables already mentioned, of which technology is only one such factor. It’s long been known that TFP also measures some business cycle phenomena. In particular, production can be increased by working the existing stock of physical and human capital harder, i.e., by increasing rates of utilization. One margin of utilization—the average workweek—can be directly observed. Others, such as worker effort and intensity of capital utilization, have to be modeled. Economists at the San Francisco Fed produce a quarterly series of utilization- adjusted TFP (Figure 12). 1500 2000 2500 3000 3500 10 13 16 19 2012$bn Figure 9: Real capital spending Source: BEA Pre-pandemic trend 0 2 4 6 8 60 65 70 75 80 85 90 95 00 05 10 15 20 %ch., saar Figure 10: Capital input Source: SF Fed, 3Q is JPM estimate -0.2 0.0 0.2 0.4 0.6 0.8 -2 -1 0 1 2 3 80 85 90 95 00 05 10 15 20 %ch, ar, both scales Figure 11: Human capital growth Source: SF Fed 16-qtr 4-qtr This document is being provided for the exclusive use of JENNA MERCHANT at JPMorgan Chase & Co. and clients of J.P. Morgan. 5 Economic Research Global Data Watch November 12, 2021 JPMorgan Chase Bank NA Jesse Edgerton (1-212) 834-9543 jesse.edgerton@jpmchase.com Michael Feroli (1-212) 834-5523 michael.e.feroli@jpmorgan.com After a brief pop toward the end of the last expansion, TFP growth (adjusted for utilization) during and since the pandem- ic appears to have returned to the slow pace that prevailed during most of the last expansion. Physical and human capital growth look to be continuing their subdued trends from the last cycle, which suggests that productivity growth should remain on a similar trend. Moreo- ver, there is no apparent shift in growth of residual unex- plained productivity, or TFP, that points to a regime shift. After the welcome level shift up during the COVID-19 reces- sion, the fundamentals point to a continuation of relatively slow productivity growth in coming years. This dive into the economic drivers of productivity—capital deepening, skills growth, etc.—will likely appear somewhat divorced from discussions that focus on specific technological stories, such as AI, robotics, or autonomous vehicles. There are a few reasons why economists tend to focus on the former set of drivers. For one, many of these technologies have been around for a while. For example, robots were first used in auto production in the US in 1961. Predicting when these technologies will become commercially viable is tricky; pre- dictions of the commercial roll-out of fully autonomous vehi- cles have been notoriously unreliable. But in almost all cases making a technology economically viable requires invest- ment, not only in R&D but also in the new equipment that usually embodies the newer vintages of technology. Produc- tivity booms tend to coincide with investment booms. Until business investment steps up more meaningfully, the odds remain low that productivity growth will shift higher. -4 -2 0 2 4 6 90 95 00 05 10 15 20 %ch, over year-ago Figure 12: Utilization-adjusted total factor productivity (TFP) Source: SF Fed This document is being provided for the exclusive use of JENNA MERCHANT at JPMorgan Chase & Co. and clients of J.P. Morgan. 6 Economic Research US: Population slowdown threatens trend growth November 12, 2021 JPMorgan Chase Bank NA Jesse Edgerton (1-212) 834-9543 jesse.edgerton@jpmchase.com Michael Feroli (1-212) 834-5523 michael.e.feroli@jpmorgan.com Analysts' Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues. Other Disclosures J.P. 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