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After posting exceptional GDP growth this year and next, the US economy will likely move into a long-term period of growth that is lower than the average prior to the financial crisis, says Moody's Investors Service. The slower growth can support the US's current Aaa rating with stable outlook, although it will make the rating more vulnerable to economic shocks and fiscal policy changes.
"While the debt metrics could deteriorate due to slower growth, it would not necessarily render the government's credit profile incompatible with its current rating in the next few years. Higher debt levels, however, would increase the vulnerability of the US to potential shocks in the longer term, putting pressure on the country's credit profile in the decade of the 2020s," says Moody's Senior Vice President Steven Hess, author of the report "US Long-Term Growth to Trend Lower, Implying Rise in Debt Burden."
Despite below-trend growth in first-quarter 2015, Moody's expects real GDP growth in the US to be in the neighborhood of 2.8% in 2015 and 2016, higher than the average 2.1% over the past four years. Productivity growth, consumer spending and nonresidential fixed investment are all supporting the current growth.
After that, growth is likely to decline.
Causes of the slowdown include an aging US population, which will lead to a lower percentage of the population being active in the labor force, and possible deceleration in overall productivity growth.
"The relatively more labor-intensive growth model in the US will become increasingly less sustainable going forward, and a slower rise in labor input will be the biggest drag on growth," says Moody's Hess.
In the report, Moody's details three scenarios for long-term growth over the next fifteen years. Its baseline scenario is for output growth to average 2.3% long term, significantly lower than the 3.7% growth in the period 1992-2007.
Moody's conservative forecast is for annual output growth of 1.5% over the next fifteen years and its optimistic forecast is for growth of 3.2%.
The US's actual long-term growth rate will be central to the US's debt to GDP ratio, a key measure of its debt burden.
Moody's central scenario calls for the US federal debt-to-GDP ratio to climb during the decade of the 2020s and reach 87% by 2030, after remaining stable for the remainder of the current decade. Moody's acknowledges that small differences from its baseline projections for productivity and labor can have an impact on the debt-to-GDP ratio by as much as 10% in either direction.
