During Fed Chair Janet Yellen’s press conference on Wednesday a question came up regarding Productivity. Chair Yellen expressed the committee’s frustration and concern over the lack of productivity growth in our economy. She cited the lower productivity growth as a reason for the Fed’s continued reduction in their long-term growth forecasts (and also a source of inflationary pressure in the years ahead.)
The long-term potential growth of an economy can be calculated by:
Growth in Labor Force + Productivity Growth
The concept is really quite simple — how many people are working and how much are they producing? Given the demographic imbalance in our country our labor force continues to shrink. Despite all of our technological improvements, productivity growth peaked shortly after the turn of the century and is expected to continue to slow (which is common in developed countries such as ours.)
The Fed’s long-term economic forecast of 1.8% is a reflection of this economic principle and something investors should keep in mind when setting return expectations.
For more information, check out “Broken Model“.