The U.S. economy to 2022: settling into a new normal
Growth in the civilian noninstitutional population ages 16 and over will continue to slow over the next decade, increasing at a compound annual rate of 0.9 percent from 243.3 million individuals in 2012 to 265.3 million in 2022. The U.S. labor force participation rate peaked at 67.1 percent from 1997–2000 and then began to drift downward, falling by about 1.0 percent before the onset of the 2007 recession. As the recession took hold, the decline in the participation rate accelerated, reaching 63.0 percent in November 2013, the most recent data available at the time of publication. As more of the baby-boom generation moves into retirement, the labor force participation rate is projected to decline another 1.4 percentage points by 2022, dropping to 61.6 percent. Coupled with the slowing population growth, the participation declines translate into slow growth of the labor force. From 2012–2022, the labor force is expected to grow from 155.0 million people to 163.5 million, an annual rate of 0.5 percent.
The nonaccelerating inflation rate of unemployment. The objective of the BLS projections is to provide a reasonable outlook on the nation’s potential economic future. Fluctuations in the business cycle are short term and hard to foresee, particularly on a 10-year horizon. Therefore, the projections are made by assuming a full-employment economy in the target year. In constructing such a scenario, a value for the nonaccelerating inflation rate of unemployment (NAIRU) needs to be supplied to the model. BLS estimate of the NAIRU is based on an assessment of historical trends and an extensive literature review. Although unemployment has remained high in the wake of the 2007–2009 recession, the forces keeping it elevated are expected to abate over time. Temporary elevations could be attributed to several factors, including structural changes leading to increased skills mismatch in the labor force, extensions of unemployment benefits, general uncertainty in the current economic climate, and a cyclical lack of demand for labor. By 2022, the unemployment rate is projected to equal the NAIRU, at 5.4 percent.
Fiscal and monetary policy. In recent years, fiscal policy in the United States has transitioned from expansionary to contractionary. During the recession, large-scale spending programs designed to stimulate the economy, primarily the American Recovery and Reinvestment Act of 2009 (ARRA), led to record budget deficits and sharp increases in the national debt. In response, measures to cut federal budgets were laid out in the Budget Control Act of 2011 (BCA), the stipulations of which specified that if lawmakers could not agree to a plan to reduce federal deficits over the coming decade, automatic spending cuts would go into effect across the board. These cuts have been popularly referred to as “the sequester.” After being postponed by the American Taxpayer Relief Act of 2012, the sequester went into effect in March 2013, enforcing cuts in both mandatory and discretionary spending. These cuts will cause a large decrease in outlays in the initial projection years, but spending is anticipated to accelerate in the latter years of the projection period to meet the needs of the nation’s aging population and fund the expansions to health insurance programs offered under the Patient Protection and Affordable Care Act.9 Without further reductions in outlays or increases in revenue, federal deficits would climb again, rapidly adding to the national debt and thereby maintaining the debt-to-GDP ratio at historically high levels. The MA/US model incorporates the cuts mandated by the BCA and assumes that spending restraint sufficient to keep the national debt at a manageable level will be exercised.