There is an almost unanimous consensus among business economists that real GDP
growth will be at a rate of 3.0 to 3.5 percent over the next two to three years. However plausible
this may be from the demand side by those who add up projected growth in consumption,
investment, government spending and net exports, it strains credulity from the supply side.
This paper applies the discipline of the “output identity” that relates real GDP growth to
productivity, the unemployment rate, the labor-force participation rate, and other components,
and asks how the consensus forecast of real GDP growth of 3.0 to 3.5 percent in 2015 and 2016
can be achieved.
The output identity is like an iron vise, because it is true by definition. For output to
grow that much faster than the 2.1 percentage point average of the last five years, something
radical has to happen. The unemployment rate has been declining at one percentage point per
year over the last four years, and even if that rate of decline were to continue and drive the
unemployment rate to 5 percent in mid-2015, to 4 percent in mid-2016, and to 3 percent in mid-
2017, there would still need to be other components of the identity to supply the demand-side
assumption of faster growth. The only two available levers to achieve this growth are labor
productivity and the labor-force participation rate