Trends in Economic Activity

Recovery in real gross domestic product growth continues at a modest rate

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AEO2012 presents three views of U.S. economic growth (Figure 58). In 2011, the world economy experienced shocks that included turmoil in the Middle East and North Africa, a Greek debt crisis with financial impacts spreading to other Eurozone countries, and an earthquake in Japan, all leading to slower economic growth. U.S. growth projections in part reflect those world events.

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U.S. recovery from the 2007-2008 recession has been slower than past recoveries (Figure 59). A feature of economic recoveries since 1975 has been slowing employment gains, and, following the most recent recession, growth in nonfarm employment has been slower than in any other post-1960 recovery [121]. The average rates of growth are strong starting from the trough of the recessions.

Slow consumption growth, fast investment growth, and an ever-improving trade surplus

AEO2012 presents three economic growth cases: Reference, High, and Low. The High Economic Growth case assumes high growth and low inflation; the Low Economic Growth case assumes low growth and high inflation. Figure 60 compares the average annual growth rates for output and its major components in each of the three cases.

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The short-term outlook (5 years) in each case represents current thinking about economic activity in the United States and the rest of the world; about the impacts of domestic fiscal and monetary policies; and about potential risks to economic activity. The long-term outlook projects smooth economic growth, assuming no shocks to the economy.

Differences among the Reference case and the High and Low Economic Growth cases reflect different expectations for growth in population (specifically, net immigration), labor force, capital stock, and productivity, which are above trend in the High Economic Growth case and below trend in the Low Economic Growth case. The average annual growth rate for real gross domestic product (GDP) from 2010 to 2035 in the Reference case is 2.5 percent, as compared with about 3.0 percent in the High Economic Growth case and about 2.0 percent in the Low Economic Growth case.

Compared with the 1985-2010 period, investment growth from 2010 to 2035 is faster in all three cases, whereas consumption, government expenditures, and imports grow more slowly in all three cases. Opportunities for trade are assumed to expand in each of the three cases, resulting in real trade surpluses by 2018 that continue through 2035.

Output growth for energy-intensive industries remains slow

Industrial sector output has grown more slowly than the overall economy in recent decades, with imports meeting a growing share of demand for industrial goods, whereas the service sector has grown more rapidly [122]. In the AEO2012 Reference case, real GDP grows at an average annual rate of 2.5 percent from 2010 to 2035, while both the industrial sector as a whole and its manufacturing component grow by 1.6 percent per year (Figure 61). As the economy recovers from the 2008-2009 recession, growth in U.S. manufacturing output in the Reference case accelerates from 2010 through 2020.
figure dataAfter 2020, growth in manufacturing output slows due to increased foreign competition, slower expansion of domestic production capacity, and higher energy prices. These factors weigh heavily on the energy-intensive manufacturing sectors, which taken together grow at a slower rate of about 1.0 percent per year from 2010 to 2035, with variation by industry ranging from 0.8-percent annual growth for bulk chemicals to 1.5-percent annual growth for food processing.

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A decline in U.S. dollar exchange rates, combined with modest growth in unit labor costs, stimulates U.S. exports, eventually improving the U.S. current account balance. From 2010 to 2035, real exports of goods and services grow by an average of 5.9 percent per year, and real imports of goods and services grow by an average of 4.1 percent per year. Strong growth in exports is an important component of projected growth in the transportation equipment, electronics, and machinery industries.

Energy expenditures decline relative to gross domestic product and gross output

Total U.S. energy expenditures decline relative to GDP in the AEO2012 Reference case (Figure 62) [123]. The projected share of energy expenditures falls from 2011 through 2035, averaging 7.5 percent from 2010 to 2035, which is below the historical average of 8.8 percent from 1970 to 2010.

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Gross output corresponds roughly to sales in the U.S. economy. Figure 63 provides an approximation of total energy expenditures relative to total sales. Energy expenditures as a share of gross output show roughly the same pattern as do energy expenditures as a share of GDP. The projected average shares of gross output relative to expenditures for total energy, petroleum, and natural gas are close to their historical averages, at 4.1 percent, 2.1 percent, and 0.5 percent, respectively.