The U.S. economy experienced a strong and economically notable acceleration in 2017, with growth in real gross domestic product exceeding expectations and increasing to 2.5 percent, up from 1.8 percent during the four quarters of 2016, and the unemployment rate falling 0.6 percentage point to 4.1 percent, the lowest since 2000. Over the course of 2017, the economy added 2.2 million nonfarm jobs, averaging 181,000 per month, with particular strength in the manufacturing (+189,000 jobs) and mining (+53,000) sectors, which had lost 9,000 and 98,000 jobs, respectively, in 2016. Challenges remain, however, because the combination of strong employment growth and modest output and real earnings growth in recent years reflects low labor productivity growth, due in part to historically low levels of capital deepening—an issue that the recently enacted Tax Cuts and Jobs Act was intended to address. In addition, long-term downward trends in labor force participation due to the aging Baby Boom generation will require fresh policy ideas to offset.
Acknowledging these challenges, the Administration’s baseline forecast for the longer term is for output to grow by an overall average annual rate of 2.2 percent through 2028, excluding the effects of the December 2017 Tax Cuts and Jobs Act. The full, policy-inclusive forecast, however, which assumes implementation of the Administration’s agenda, is for real gross domestic product to grow by 3.0 percent a year, on average, through 2028. We expect growth to moderate slightly after 2020, as the capital-to-output ratio approaches its new, post-corporate tax reform steady state, and as the pro-growth effects of the individual elements of the Tax Cuts and Jobs Act dissipate (though the level effect remains permanent). The current Administration’s long-run, policy-inclusive forecast is conservative relative to those of previous administrations, and is in fact slightly below their median of 3.1 percent. Moreover, the baseline forecast is exactly in line with the long-run outlook given in the 2017 Economic Report of the President, reflecting our view that non-implementation of the Administration’s policy objectives would simply result in a reversion to the lower growth expectations of recent years. But if these objectives are implemented, the expected contribution to long-run growth of the resulting deregulation and infrastructure investment will offset the declining contribution to growth of corporate and individual tax cuts and reforms near the closing of the budget window. On average, through 2028, the Administration expects deregulation and infrastructure investment to each contribute to GDP growth beyond 2020. Consistent with growth slowing slightly in the latter half of the budget window, from 3.2 percent in 2019 to 2.8 percent in 2028, the Administration expects unemployment to gradually return to its natural level, which will also stabilize inflation.