November 15, 2012 / 12:01 AM / in 5 years

Growth potential shifts to lower gear: CBO

WASHINGTON (Reuters) - The economy is recovering at an agonizingly slow pace largely because its potential growth rate has been stunted by structural shifts to its workforce and a dearth of investment, the non-partisan Congressional Budget Office said on Wednesday.

In a new report that offered a gloomy outlook for U.S. growth prospects, the CBO said the cumulative rate of growth in U.S. output since the end of the recession in 2009 was running nearly nine percentage points below the average for previous recoveries.

The non-partisan congressional budget referee attributed two thirds of this phenomenon to a reduction in the potential growth rate -- the amount that gross domestic product could expand if conditions were right.

CBO said one third of the growth deficit was due to cyclical factors resulting more directly from the recession itself -- chiefly lower government purchases of goods and services, lower investment in housing and reduced consumer spending.

The structural factors cited by CBO point to a slower gear for the U.S. economy -- the dreaded “new normal” that was hotly debated this fall during the presidential election campaign.

Both President Barack Obama and Republican challenger Mitt Romney had charged that the other’s policies would lead to a diminished economic future, while touting their own as laying a foundation for brighter growth and employment prospects.

As Congress and the White House dive into high-stakes negotiations over expiring tax cuts, automatic spending cuts and deficit reduction plans, the future U.S. growth rate is critical to their decisions.

Republicans maintain that sufficient new revenues could be generated from faster growth spurred on by sweeping tax reform that eliminates distortions caused by special tax breaks. Obama wants to raise some $1.6 trillion in tax revenues largely by imposing higher rates on the wealthy.

“The effects of the recession and slow recovery on potential output will persist over the coming decade,” CBO said in the report. “According to CBO’s estimates, the recession and weak recovery will reduce the level of potential GDP in 2022 by about 1.5 percent.”

Incorporating these factors, the CBO projects real GDP growth at between 2.1 percent and 2.4 percent in 2022, depending on fiscal choices made by Congress. U.S. GDP expanded at a 2.0 percent annual rate in the third quarter.

In the CBO’s analysis, the biggest factors holding back potential growth are worrisome trends in the U.S. workforce. Potential employment grew by only 2.3 percent between the 2009 and 2012 second quarters, less than half the post-World War Two average.

Slowing population growth, retirement of workers from the Baby Boom generation and a halt in growth of women participating in the workforce have all contributed, but the report said massive, long-term job losses during the recession made many workers obsolete.

“An unusually large number of people have had their skills and connection to the workforce erode because they have been out of work for a long time,” CBO said in the report. “Some of those people will probably never work again, and it will take more time than usual for the rest to find suitable jobs.”

In addition, the CBO said the potential U.S. growth rate was slammed by “unusually low levels” of business investment during the recession that are still low by historical averages. Housing investment also remains sharply curtailed amid a chronic slump.

And in a sign of a vicious cycle, the CBO said part of the low investment levels are due to a lack of consumer demand and the lower potential growth of employment.

Reporting by David Lawder; Editing by Phil Berlowitz

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