Bloomberg reports that a "Revolutionary" Federal Reserve study is "shaking economists’ forecasts by suggesting the U.S. economy will have to decelerate much more over the next decade than most now expect."
The study won’t be out until July (we referenced it last week here) and was drafted by Stephanie Aaronson, Bruce
Fallick, Andrew Figura, Jonathan Pingle and William Wascher.
What makes the study so controversial is that the "retirement of the Baby Boom generation will force far-reaching adjustments in the way the economy works. Forecasts for everything from growth and employment to corporate profits and interest rates will have to be recast."
From the Bloomberg column:
The study projects a slower pace of workforce growth than most economists now forecast, suggesting the economy can’t keep growing at the present-day pace without generating pressure for higher wages and inflation. To prevent that, the Fed will have to enforce a lower speed limit on the economy by pushing up interest rates.
The study suggests that growth over the next 10 years will average less than 3 percent, instead of the 3.3 percent of the last decade, economists said. A 0.3 percentage point difference in growth in the $12 trillion U.S. economy translates into $360 billion over 10 years, equal to the size of Switzerland’s economy. Payroll gains, which averaged 200,000 a month in the 1990s, may be half that.
“This is a very big story,” said Laurence Meyer, vice chairman of Macroeconomic Advisers LLC and a former Fed governor. “It makes the challenge for the Fed a little greater.”
The study also conservatively projects a "3 percentage-point decline over the next 10 years in the labor force participation rate." (We’ve been discussing the drop in the the percentage of people working or looking for work for some time now).
As the participation rate drops, so to will the Growth Rate slow. Labor force growth will slow, as will hours worked.
What makes this so significant is the that the Fed Study estimates are "well below current government and private forecasts." This will impact everything from Federal Deficits to Social Security.
‘Revolutionary’ Fed Study Has Economists Rethinking Forecasts
Carlos Torres, Rich Miller
April 13, 2006 00:10 EDT
The Recent Decline in Labor Force Participation and its Implications for Potential Labor Supply
Stephanie Aaronson, Bruce Fallick, Andrew Figura, Jonathan Pingle, and William Wascher
Division of Research and Statistics, Board of Governors of the Federal Reserve System
March 2006, Preliminary Draft