Absent significant productivity gains, the best growth rates for the US economy are probably behind us for this business cycle. Yes, GDP growth is likely to bounce from last quarter’s 1.4% (or the 4-quarter average of 1.3%), reflecting payback from persistent inventory drag, but durable growth in the US any faster than our recent rate is probably unsustainable. Our slow working-age population growth and unimpressive productivity growth are severely limiting the US potential growth rate. In prior posts, I’ve discussed why I believe the best we can do over the next decade is about 1.4%.  Low potential growth rates aren’t always a problem or a hindrance however; when unemployment is high, reflecting significant untapped labor resources, the economy can grow consistently above potential as new jobs are created and previously sidelined workers reenter the economy as producers. This has occurred since 2009, so even though our post-crisis average growth rate of around 2% has felt uninspiring, it’s still been considerably above potential. We know this by definition, because the unemployment rate has fallen from 10% to 5%. Operating above potential is the way an economy brings underutilized labor back into productive jobs.
Now though, as the unemployment rate has fallen toward levels which reflect tightening labor supply (fewer available and suitable workers), one of three things must happen: 1) actual growth slows, 2) potential growth speeds up through higher productivity*, or 3) inflation pressure builds.
The reality is that actual growth has been slowing. Over the past year, our growth rate has averaged 1.3%, which is at-or-below our potential growth rate. And, sneakily, the unemployment rate has stopped going down. In fact the most recent September employment report showed our unemployment rate at 5.0%, which is actually now above the 12-month average of 4.9%. As with nearly everything in economics, there are easy ways to dispute these points. First, our growth rate over the past five quarters has been negatively impacted by inventory drag. That is, companies are replenishing inventories slower than the inventories are being depleted by consumption, which reduces the measured Gross Domestic Product. Secondly, our unemployment rate has risen recently because the Labor Force Participation Rate has risen – new entrants to the labor market are now looking for jobs. These are positive mitigants for otherwise concerning statistics. However, if potential growth in the US is around 1.4% and realized growth has been around 1.2%-1.4%, then we would expect the unemployment rate to stop declining. And it has, plain and simple.
It is possible that these two economic data points are coincidentally affected in the right way by separate factors (inventories and labor force participation) as to look consistent with growth converging to potential, when in reality they are a red herring. The timing would also have to be coincidental though, because the general pattern of slowing growth in the US began in Q4 2014, almost exactly the time when the Fed’s balance sheet stopped increasing, and measures of monetary conditions such as the Wu-Xia shadow Fed Funds rate began rising. To me, the simplest explanation is that realized growth has been slowed by tighter financial conditions, and because potential is so low, the extent of the tightening necessary to bring growth down was pretty small. Because the inventory effect has distorted the recent growth stats lower, I do believe that some modest amount of further tightening will be necessary to bring US growth down to potential, but absent productivity gains, the Fed needs slower growth to fulfill their dual mandate (though they would not say it like this).
This is one core reason why fiscal stimulus that fails to facilitate rapid productivity gains is undesirable and far from a silver bullet to return the economy to the “old normal” growth rates. Productivity gain needs to be the critical focus, of both stimulus and “structural reforms.”
Ordinarily, calls for fiscal stimulus would occur during the recovery phase, when monetary policy is loose and lots of labor market slack remains. Now, we have fiscal spending in the policy discussion as labor markets are tight, and the Fed is trying to tighten monetary policy. The fact that fiscal stimulus is still an active part of the discourse with the unemployment rate so low here in the US really illustrates how reluctant all of us are to accept that structurally slow growth may be inevitable. 
*Sticklers will note that I have omitted immigration or lengthening the work week as other release valves for expanding potential growth. You’re right. But I consider productivity gain to be the lowest hanging fruit.
 For a reminder of why slow growth makes life difficult for politicians, Main Street, and Wall Street, see: Structurally Slowing Growth: Some Implications