Quietly Braking the Economy

At the core of economic growth are two main factors: population growth and productivity.  All else equal, a larger population enables more production and consumption, but the quality and skills of the workforce are equally important.  When output per hour rises due to higher productivity, the cost per unit tends to fall, potentially driving down prices and increasing consumption, especially when markets are competitive and even more so when incomes are rising as well.

Firms consistently compete for edges in their marketplaces, helping to drive productivity.  But what pushes population growth?  Births certainly help, specifically if they are outpacing an economy’s death rate.  Immigration is another contributor to population growth.  For generations, America has been able to grow its population each year, but there is some concern that it will not do the same this year.

A recent study from the American Enterprise Institute (AEI) suggests the country risks shrinking in population in 2025.  Low birthrates coupled with shifting immigration dynamics are potentially leading to this outcome. While not a forgone conclusion, this article from the AEI makes the case that the labor market may not be able to produce as many jobs each month as seen in the past.  The authors argue that America’s potential employment growth could be limited to between 10,000 and 40,000 each month, much less than the six-figure totals we’ve seen for decades.

A slowing growth rate for employment will likely impede economic growth.  Yes, productivity gains should offset some of this, but it may not be enough.  If it is not adequate, America may be in an era when potential economic growth is restrained.  This shift could mark a turning point.  Without a growing labor force, the economy may struggle to sustain the momentum it once enjoyed.  Policymakers and business leaders alike may need to rethink strategies for growth in a world where demographic tailwinds are no longer guaranteed.