Aggregate Implications of Changing Sectoral Trends

55 Pages Posted: 31 May 2019 Last revised: 1 Jun 2019

See all articles by Andrew Foerster

Andrew Foerster

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Andreas Hornstein

Federal Reserve Bank of Richmond

Pierre-Daniel G. Sarte

Federal Reserve Bank of Richmond

Mark W. Watson

Princeton University - Woodrow Wilson School of Public and International Affairs; National Bureau of Economic Research (NBER)

Date Written: 2019-05-28

Abstract

We find disparate trend variation in TFP and labor growth across major U.S. production sectors over the post-WWII period. When aggregated, these sector-specific trends imply secular declines in the growth rate of aggregate labor and TFP. We embed this sectoral trend variation into a dynamic multi-sector framework in which materials and capital used in each sector are produced by other sectors. The presence of capital induces important network effects from production linkages that amplify the consequences of changing sectoral trends on GDP growth. Thus, in some sectors, changes in TFP and labor growth lead to changes in GDP growth that may be as large as three times these sectors' share in the economy. We find that trend GDP growth 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 and Services make up close to sixty percent of the estimated trend decrease in GDP growth. In addition, the slow process of capital accumulation means that structural changes have endogenously persistent effects. We estimate that trend GDP growth will continue to decline for the next 10 years absent persistent increases in TFP and labor growth.

Keywords: trend growth, multi-sector model, production linkages

JEL Classification: C32, E23, O41

Suggested Citation

Foerster, Andrew and Hornstein, Andreas and Sarte, Pierre-Daniel and Watson, Mark W., Aggregate Implications of Changing Sectoral Trends (2019-05-28). FRB Richmond Working Paper No. 19-11. Available at SSRN: https://ssrn.com/abstract=3397339

Andrew Foerster (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of San Francisco

101 Market Street
San Francisco, CA 94105
United States

Andreas Hornstein

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States
804-697-8266 (Phone)
804-697-8255 (Fax)

Pierre-Daniel Sarte

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Mark W. Watson

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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