Former Federal Reserve Chair Janet Yellen warned that policymakers at the U.S. central bank are too positive about the U.S. economy and should probably downgrade their forecasts of how they expect the gross domestic product to grow over the long term.
At the Fed’s most recent policy meeting in mid-September, policymakers predicted their median estimate for long-term GDP growth was at 1.9% — which is already fairly lackluster compared to the 3% growth of the past few decades. Their 2019 GDP forecast was increased to 2.2%, about 0.1% higher than originally predicted.
“It’s actually an optimistic projection,” said Yellen, whose run as the Fed chair started while former President Barack Obama was in office in 2014 and ran until 2018.
Yellen said the central bank has overestimated the current economy’s strength based on three big factors including demographics, education and productivity.
The labor-force growth is only a meager 0.5% because population growth has slowed in recent years. Yellen said in the 1980s, labor-force growth received a big shot in the arm thanks to “an influx of women” joining the labor force.
“Another reason the 1.9% number is not very high has to do with education. Improvements in average educational attainment of the labor force also boost economic growth,” Yellen said. “That’s continuing to rise, but it’s not rising as rapidly as it used to.”
Yellen also argued that productivity has been underwhelmingly low for several years now. Labor-force productivity has grown by more than 2% in only four quarters since 2015, according to statistics from the Department of Labor.
During the second quarter of this year, the economy grew at a 2% clip, boosted mainly by strong consumer spending — the strongest in more than four years, in fact.
But business investment contracted by 1%, a great deal more than the previously predicted 0.6%, as the ongoing trade war with China has weighed on big companies and caused them to hold off on spending (unless it’s on stock buybacks).
“The economy seems less dynamic than it used to be,” Yellen said.