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Economic Trends

The convergence of the tumultuous technological, global, and demographic trends is creating many challenges for the U.S. economy (see Table 1.4). An important driver of the United States’ dominant position as the world’s leading economic power for decades has been its growing and well-educated labor force. However, as the U.S. labor force growth rate continues to fall and as the imbalances of supply and demand of needed skills increase, the United States is facing severe pressures in maintaining its lofty position. To make matters even more difficult, the United States is dealing with these negative labor force trends at a time when the demand for high-skilled talent and global competition is intensifying.

Table 1.4 Economic Trends

Evolving knowledge economy

Slower consumption

New global economy

Evolving Knowledge Economy

Technological advances are fundamentally changing the economy and the underlying drivers of growth. Since the 1950s, the United States has been evolving from an industrial-based to a knowledge-based economy. From 1950 to 2003, manufacturing’s share of total employment in the United States fell from 33.1 percent to 10.7 percent (ETS, 2007). Authors Pine and Gilmore say we are witnessing the beginning of a new economy following the service and knowledge economies called The Experience Economy, the title of their 1999 book on the subject. Products like the iPod, iPhone, and iPad that provide an intense experience for the end user and generate an enormous amount of consumer loyalty are prime examples of what is needed to succeed in this new economy (Pine and Gilmore, 1999). Amazon.com’s desire to constantly improve the user experience and Google’s “perpetual beta” site that is never finished because it is constantly being tested, improved, and fine-tuned for optimal user experience are other examples (Hinssen, 2010). As we compete in a knowledge-based and experience economy, the demand for tacit work that requires knowledge workers who possess complex skills will continue to increase. It’s estimated that by 2015, knowledge workers will account for 44 percent of the U.S. workforce.

Throughout the 1990s and 2000s, the U.S. economy has been a beneficiary of strong productivity growth mainly as a result of large investments in computer and communication technologies. Labor productivity is a critical contributing factor to GDP growth resulting in greater output for a given level of employment. Higher output per worker in turn results in higher wages and more profits, which collectively contribute to overall improvements in living standards. During the 2000 to 2010 period, labor’s productivity, as measured by output per hour, grew at a 2.5 percent annual growth rate nearly 25 percent higher than the historical average. Productivity growth actually spiked immediately after the 2007–2009 recession as businesses grew output with fewer workers. However, even with continued technology investments, the structural shifts in the labor force are putting a damper on labor productivity growth, which is projected to decline over the 2010 to 2020 period back to its historical average at a 2.0 percent annual growth rate (Byun and Frey, 2012).

Slower Consumption

Slowing labor force growth and participation rates as well as declining incomes for many workers are negatively impacting personal consumption growth rates. Baby boomers are also experiencing greater financial challenges. Due to low savings rates and increasing debt, nearly two-thirds of the oldest baby boomers have insufficient funds saved for retirement (Beinhocker et al., 2009). As a result, it’s expected that there will be a significant increase in savings and a reduction in spending for a cohort that has been a huge a driver of consumption until now. When the baby boomers start to retire and begin drawing down on their savings, the negative impact on consumption will be significant. Given the smaller cohort waiting in the wings to replace the boomers, worker productivity will have to substantially increase to make up for this anticipated shortfall in GDP.

Median household income has been under pressure and actually declined from 2000 to 2010. Indeed, for the first time since World War II, incomes for middle-class families during the first decade of the 21st century are lower than what they were 10 years earlier. The median household income in 2010 was $50,046, down 8.9 percent from 2000 (Berube et al., 2011). By 2011, just more than one-half of the U.S. population was classified as middle class, defined as having annual incomes between $39,000 and $118,000 for a three-member household, which is down from 61 percent in the early 1970s (Pew Research Center, 2012).

As a result of these trends, personal consumption expenditures (PCE) are projected to grow at much slower rates compared to previous decades. Consumers were increasing their expenditures at a robust 3.6 percent annual growth rate from 1990 to 2000. During the 2000–2010 time period, the average PCE continued to grow at a high rate during the first several years and then fell dramatically during the recession resulting in a low 1.9 percent average annual rate. Looking forward to the 2010–2020 time period, the BLS predicts an average annual PCE growth rate of 2.7 percent, a modest increase but well below the growth rates of previous decades (Byun and Frey, 2012). Given that PCE comprise approximately 70 percent of the U.S. nominal gross national product (GNP), the impact on the future economic growth rate will be negative.

New Global Economy

The evidence is quite compelling that the United States’ economy is experiencing a structural economic shift that will impact businesses’ and workers’ opportunities for many years to come. Following World War II, the United States was the uncontested largest economy. As Europe and Japan rebuilt and as the developing world invested in its institutions and infrastructure, it was only a matter of time before the rest of the world would catch up with the United States economically.

In just one generation, the United States went from being the world’s largest creditor to the largest debtor. The U.S. trade deficit ballooned from $35.2 billion in 1992 to a peak of $729.4 billion in 2006. By 2010, the trade deficit stood at $658 billion. Most of the deficit was attributable to the trade of manufactured goods rising from $79 billion to $509 billion. The only sector that generated a trade surplus was in services, which saw a modest increase from $78 billion to $88 billion. It is estimated that the rising deficit translated to a net loss of approximately 3.8 million jobs in 2006 (McKinsey Global Institute, 2009b). Over the coming decade, export growth is expected to be larger than import growth, which will narrow an albeit high trade deficit from $421.8 billion in 2010 to $193.3 billion in 2020 (Byun and Frey, 2012).

It is impossible to talk about global economic trends without considering the BRIC countries. The prediction of the rise of the BRICs was quite accurate, as their combined annual growth rate over the past 20 years of 5.8% far exceeded the 2.5% annual growth rate of the developed countries. The growing emerging economies are often referred to as the E7, which in addition to the BRICs include Indonesia, Mexico, and Turkey (Hawksworth, 2006). By 2050, the E7 collectively is projected to have a larger economy than the current largest developed economies of the world called the G7, which includes the United States, Japan, Germany, United Kingdom, France, Italy, and Canada.

Today, the United States continues to have the undisputed largest economy in the world with a nominal GDP approaching $16 trillion as of the second quarter in 2012 (Bureau of Economic Analysis, 2012). However, its contribution to global output and its dominance dictating global economic affairs will continue to get smaller as the rest of the world continues to grow. Looking toward the future, the only country that is projected to challenge the U.S. position as the largest economy is China. Depending on how you measure GDP (using market exchange rates or purchasing power parity), there is debate on when China will eclipse the United States as the largest in the world. However, there are many risks in making long-term predictions because many unpredictable events can occur between now and then.

During the late 1980s, many people were predicting that Japan would overtake the United States as the largest economy; however, it’s 2013, and Japan has not only failed to overtake the United States but also is now the third largest economy having fallen behind the United States and China. Though long-term forecasting is a dangerous profession, demographic trends are the most predictable, and it’s indisputable that China’s large and talented population will be an economic force to reckon with for many decades to come. Thus, many economists are predicting that China will have the largest economy in the world surpassing the United States sometime around 2050. However, in 2050, the United States is projected to still have the highest GDP per capita by far than any other country in the world at more than twice China’s GDP per capita, which is projected to be 15th in the world.

This unprecedented situation, whereby a country has the second largest economy in the world but with a low GDP per capita, is likely to create an enormous amount of policy and business challenges for China well into the future. China is also witnessing a demographic crisis that may derail its hot growth rate in the near future. China’s low fertility rates, rapidly aging population, and slowing population growth rate are creating significant supply and demand imbalances of young working-age people. Coupled with wage inflation and comparatively low productivity levels, China’s dominant position as one of the world’s lower-cost manufacturers is in jeopardy.

The other dominant emerging market, India, is on a quite different trajectory. By 2030, India is expected to replace China as the world’s most populous country. India also has a much younger and growing population that will yield economic benefits for decades to come. By 2020, the average age in India is estimated to be 29 years, compared to 37 years in both China and the United States. The economic impact of projected demographic trends in Europe and Japan are much more negative as their populations get smaller and reach an average of 45 and 48, respectively, by 2020 (Mitchell et al., 2012).

The United States’ other dominant partner in the developed world is the European Union (EU), which is also facing deep economic problems that are further diminishing the developed countries’ slice of the global economic pie. The sovereign debt crisis infecting many European countries has dramatically increased borrowing costs resulting in draconian cuts in government expenditures and commercial lending. There is concern of another banking crisis as many of these institutions holding government debt are fearful of defaults, which can result in €billions of losses and create a collapse of the global financial system. Making matters worse, Europe must respond to these challenges while facing a demographic crisis of epic proportions.

Due to a declining population, the median age in the EU is projected to rise from 40.4 years in 2008 to 47.0 years in 2060 when the number of people age 65 and over will almost double. Critically, during this time, the working-age population is projected to decline by 15 percent, and the dependency ratio (ratio of people age 65 and above to working-age population) will double. As a result, the EU will move from having four workers to support every retiree to only two. Given that most European countries spend more on public pension benefits than other advanced countries, these negative demographic trends are creating an unfunded pension crisis that will put enormous stress on government treasuries (Lannquist, 2012).

The continuing decline of the United States’ leading global economic standing is both a cause and a result of the structural shift in its labor force. The United States is facing hypercompetition at a time when its labor force growth rate is declining and skills gap is widening, creating significant headwinds for economic growth. At the same time, American workers are experiencing the effects of globalization. A large segment of the labor force finds itself in direct competition for jobs with lower-wage workers around the globe, and leading-edge scientific and engineering work is taking place in many parts of the world. As a result of advances in computer and communication technologies and a highly interdependent global economy, workers in virtually every sector must now face competitors who live just a plane ride or mouse-click away.

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