Why was U.S. economic growth in the 1980s not stronger? Appraisal of an optimistic projection for 1981 to 1990.

• Author: Kendrick, John W.
• Position: Communications

My 1983 presidential address to the Southern Economic Association was published in the April 1984 issue of the Journal under the title " Long-Term Economic Projection: Stronger U.S. Growth Ahead". After a general discussion of methodology, I presented my projection of real gross product, factor inputs, total factor productivity (TFP), unit costs and the implicit price deflator index for the U.S. business economy for the periods 1981-90 and 1990-2000. Publication by the Bureau of Labor Statistics (1991) of the relevant time series through 1990 makes possible an evaluation of the accuracy of the 1981-90 projection and an analysis of why it turned out to be on the high side.

Analysis of why forecasts went wrong may help to improve future efforts. Of more general interest, I believe that my analysis helps explain why U.S. economic growth in the 1980s was not stronger.

The acceleration in growth of real gross product from a 2.0 percent annual average rate between 1973 and 1981 to 3.2 percent 1981-90 did justify the subtitle of the article "Stronger U.S. Economic Growth Ahead." But actual growth was significantly below the projected rate of 4.0 percent. Actually, the range within which I expected the growth rate to fall was set from 2.5 to 4.5 percent [6,950]. Obviously, I would have done better to take the mid-point of the range, particularly since it was closer to the consensus of long-range projections available at that time. It is usually safer to occupy a position close to the consensus of forecasts rather than one further out on either side.

1. Comparison of Actual with Projected Rates of Change

   As shown in Table 1, my projection of the growth rate of total factor input was on target. The over-shooting of the output growth rate was entirely due to overestimating the strength of the come-back in TFP at 1.8 instead of 1.0 percent average annual growth. Further, whereas my projection of the deceleration in unit labor costs from 8.3 to 3.2 percent a year was on the mark, I underestimated the deceleration in the implicit price deflator by one percentage point.

   [TABULAR DATA OMITTED]

   Even the precision of the input and unit cost projections must be credited to that guardian angel of forecasters - offsetting errors in components. In the case of inputs, I underestimated the growth of labor and overestimated the growth of capital. In the case of unit labor costs, an overestimate of the rate of increase in average hourly labor compensation was exactly offset by the overestimate of labor productivity shown in the table. The...