On a different but related note, the New York Fed's Nowcast for Q2 GDP growth is at 1.48% while the Atlanta Fed's GDPNow guess is at 1.3%.
From the Federal Reserve Bank of San Francisco, June 24:
....MUCH MOREEstimates suggest the new normal pace for U.S. GDP growth remains between 1½% and 1¾%, noticeably slower than the typical pace since World War II. The slowdown stems mainly from demographic trends that have slowed labor force growth, about which there is relatively little uncertainty. A larger challenge is productivity. Achieving GDP growth consistently above 1¾% will require much faster productivity growth than the United States has typically experienced since the 1970s.
Before the Great Recession, a GDP growth rate of 3% or higher seemed normal for the United States. For example, annual growth from 1987 to 2007 averaged 3%. In contrast, the pace since the end of the Great Recession in 2009 has been much slower, averaging only 2.3% per year through the end of 2018. Over the past two years, however, growth has averaged a bit higher at 2.7%. This raises the hope that longer-run, or trend, growth might be stronger than it appeared a few years ago—even if it is still falling short of its pre-2008 pace.
In this Letter, we update the analysis in Fernald (2016) regarding the underlying components of sustainable growth—hours worked and productivity, measured as output per hour. Despite the recent speedup in growth, we conclude that a range of 1½% to 1¾% remains a more reasonable best guess for longer-run growth.
This slow pace relative to history reflects two factors. Most importantly, demographic trends leave little doubt that the labor force will grow slowly at best over the next decade. There is more uncertainty about the other factor, productivity growth. Our forecast assumes that productivity will grow at a pace similar to recent decades. Averting this slow-growth future would require a sustained increase in productivity growth.
Differentiating the trend from the cycle
The Federal Reserve has a congressional mandate to pursue maximum employment. This means policymakers must assess what pace of growth is consistent with keeping employment at the desired level. If employment is below that level—such that unemployment is too high—then economic activity needs to grow more quickly than this longer-run sustainable trend pace to boost employment and bring unemployment down.
It can take years to achieve this employment objective. Hence, the Fed typically considers the sustainable trend to be the expected pace of growth “over the longer run (say, five to six years from now) in the absence of shocks and assuming appropriate monetary policy” (Danker 2012). We follow the same assumption in this Letter.
In practice, however, given past shocks, the convergence to this longer-run trend can be faster or slower than five to six years. Concretely, when the recovery began in 2009, the unemployment rate was close to 10%. Unemployment has fallen steadily since then, which indicates that the economy has grown faster than its sustainable pace over this entire period. The current unemployment rate is less than 4%—much closer to its sustainable level than it was in 2009.
Demographics as a driver of slow growth
Demographics are the key reason future trend growth is expected to be low relative to history. Figure 1 shows that labor force growth has slowed markedly since the 1970s, when baby boomers reached working age and female participation in the labor force rose rapidly. However, stagnating growth in female participation since the 1990s combined with projections for birth rates, immigration, and mortality suggest growth of the traditional working-age population ages 16-64 is slowing to a historically low pace....
