2019-16 | July 2020
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Aggregate Implications of Changing Sectoral Trends
We find disparate trend variation in TFP and labor growth across major U.S. production sectors that together imply secular declines in aggregate labor and TFP growth. We study the implications of this trend variation given linkages between sectors including, crucially, in the production of investment goods. We estimate that the annual trend rate of growth of GDP has declined by more than 2 percentage points since 1950, and that this decline has been primarily shaped by sector-specific rather than aggregate factors. Sustained contractions in growth specific to Construction, Nondurable Goods, and Professional and Business Services by themselves are responsible for close to sixty percent of the estimated trend decrease in GDP growth. The importance of idiosyncratic trend shocks arises in part because, even absent non-linearities in production, the endogenous response of capital to trend changes in TFP and labor amplifies the knock-on effects of production linkages. Capital deepening contributed around 0.5 percentage points to growth throughout most of the post-war period, surged in the early 1990's but reversed course shortly thereafter, and has now been negative for most of the past two decades. Finally, because trend shocks propagate endogenously through capital accumulation, we estimate that trend GDP growth will continue to decline for the next 10 years absent new shocks that persistently raise TFP and labor growth.
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Foerster, Andrew, Andreas Hornstein, Pierre-Daniel Sarte, and Mark Watson. 2019. "Aggregate Implications of Changing Sectoral Trends," Federal Reserve Bank of San Francisco Working Paper 2019-16. Available at https://doi.org/10.24148/wp2019-16