U.S. economy risks stuck in low-growth trap

The U.S. economy risks getting stuck in a prolonged period of low-growth amid slowing productivity and a shrinking middle class, the International Monetary Fund (IMF) has warned.

The U.S. economy grew at an annual rate of 1.2 percent in the second quarter this year, following a downwardly revised 0.8 percent gain in the first quarter, according to the U.S. Department of Commerce. That marked the third straight quarter in which the U.S. economy grew at lower than 2 percent, the weakest period in four years.

The weaker-than-expected economic data underscores the continuing frustration about the current U.S. recovery, which has repeatedly failed to shift to higher gear in the past seven years.

The U.S. economy has grown at an average pace of 2.1 percent since the recession ended in the mid-2009, registering the weakest U.S. economic expansion since World War II. During the postwar period up to the current recession (1947-2007), the average annual growth rate for the United States was 3.4 percent.

The IMF warned in June that the United States faces "potentially significant longer-term challenges" to strong and sustained growth, including a shrinking labor force and middle class.

"A rising share of the U.S. labor force is shifting into retirement, basic infrastructure is crumbling, productivity gains are scanty, and labor markets and businesses appear less adept at reallocating human and physical capital," the IMF said in a report after concluding its annual economic health check on the U.S. economy.

"These growing headwinds are overlaid by pernicious secular trends in income: labor's share of income is around 5 percent lower today than it was 15 years ago, the middle class has shrunk to its smallest size in the last 30 years, the income and wealth distribution are increasingly polarized, and poverty has risen," the report said.

Christine Lagarde, managing director of the IMF, highlighted "four forces" that would pose challenges to the future growth for the U.S. economy -- declining labor force participation, weak productivity growth, increasing polarization in distribution of income and wealth, and a rising population in poverty.

These forces would not only exert important economic but also political impact on the United States, Lagarde said, warning that the rising trade protectionism touted in the current U.S. presidential campaign would not be conducive to productivity growth.

The IMF called on Washington to resist all forms of protectionism, increase infrastructure investment, reform corporate income tax and upgrade social programs for the nonworking poor, in order to secure sustainable growth.

"If left unchecked, these forces will continue to drag down both potential and actual growth, diminish gains in living standards, and worsen poverty," the IMF said.

Federal Reserve Chair Janet Yellen said in June that a number of "considerable and unavoidable" uncertainties could affect the country's economic outlook, including sluggish global growth, weak business investment, low U.S. productivity growth and uncertainty about the outlook for inflation.

Productivity growth is the key determinant of improvements in living standards, but it has slowed dramatically in recent years, with an average pace of less than 0.5 percent per year since 2010.

"There is some evidence that the deep recession had a long-lasting effect in depressing investment, research and development spending, and the start-up of new firms, and that these factors have, in turn, lowered productivity growth," Yellen said, hoping that productivity would bounce back in the future.

But the latest data showed that U.S. labor productivity fell for the third straight quarter in the April-June period, the longest slide in productivity since the late 1970s, according to the U.S. Department of Labor.

Nonfarm business sector labor productivity, measured as the output produced by all American workers per hour worked, decreased at a 0.5 percent annual rate in the second quarter, compared with a 0.6 percent decline in the first quarter, the department said.

The economy's potential future growth will be slower than previously expected unless productivity recovers, experts said. Federal Reserve governor Jerome Powell warned this month that there is an increasing risk for the U.S. economy to become trapped in a prolonged period of subdued growth.

"The probability of an era of weaker growth, lower potential growth, for a longer period of time -- that worries me more than it used to," Powell said in an interview with the Financial Times, adding that the sluggish growth needs lower interest rates than previously expected.

Catherine Mann, chief economist at the Organization for Economic Co-operation and Development, also warned that the prolonged period of low growth has precipitated a self-fulfilling low-growth trap.

"The longer the global economy remains in the low-growth trap, the more difficult it will be to break the negative feedback loops, revive market forces, and boost economies to the high-growth path," Mann said.

(APD)