Trend Productivity Growth Points Downward

Michael Mandel reports Robert Gordon's view of recent productivity trends:

Bob Gordon Has Bad News About Productivity, by Michael Mandel on February 06: Investors breathed a sigh of relief when they saw this morning’s productivity number—1.8% in the fourth quarter—was not as bad as expected.

But they may have exhaled too soon. The key number for the economy ... is the underlying rate of productivity growth, also known as ‘trend productivity’—and the news there isn’t good.

Robert Gordon, the Northwestern University economist and productivity guru, just sent me his latest estimate of trend productivity growth— and according to his calculations, the trend productivity growth is now back to 1995 levels! In other words, all the New Economy productivity surge seems to have disappeared.

More precisely, his calculations (including this morning’s numbers—amazingly fast work, Bob!) show trend productivity running at a 1.78% annual pace. The last time it was this low was the fourth quarter of 1995.

Here’s the chart:

...Bob wrote:

The continuing decline in the productivity growth trend provides further evidence that the productivity growth revival of 1995-2004 was a one-time event. In the late 1990s the primary cause of the productivity growth revival was the dot.com boom and invention of the WWW. During 2001-03 the further good news on productivity growth was due to a combination of the delayed impact of the 1990s technology surge (the “intangible capital” hypothesis) with unusually savage corporate cost cutting that caused the prolonged decline in payroll employment between 2001 and 2003.

Yowza. Lower trend productivity growth suggests that a period of sluggish economic and profit growth is on the horizon, and that inflation may turn out to be a bigger problem than expected.

Dean Baker adds:

Good News: Hours Are Falling, by Dean Baker: That is not quite what the news reports said, but it's close. Several news accounts (e.g. the WSJ and AP) noted the 1.8 percent rate of productivity growth in the fourth quarter, and pronounced it as good news.

The growth rate was in fact stronger than the 0.0 - 0.5 percent range that most economists had expected. However, the problem is that the faster than expected rate of productivity growth is attributable to fact that hours worked fell at a 1.5 percent annual rate for the quarter. This is the second consecutive reported drop in quarterly hours. Since 1970, we have only seen two consecutive quarters of declining hours when the economy was entering or leaving a recession.

Update: I meant to add that this will make the Fed's job harder - with lower anticipated growth due to falling productivity, inflation concerns will heighten. And on the Fed's inflation concerns, see Philadelphia Fed president Plosser's remarks today (though note that he is generally hawkish):

Unfortunately, I expect little progress to be made in reducing core inflation this year or next, and I am skeptical that slower economic growth will help. All you have to do is recall the 1970s when we experienced both high unemployment and high inflation to appreciate that slow economic growth and lower inflation do not necessarily go hand in hand. …

There are those who have expressed the view that in times of economic weakness, the Fed must not worry about inflation and should focus its entire effort on restoring economic growth by dramatically driving interest rates down as far and as rapidly as possible. ... But the Fed has a dual mandate for a reason. Price stability is a necessary component for achieving sustained economic growth. Ignoring price stability during times of economic weakness risks undermining our ability to achieve economic growth over the long run. It fuels higher inflation down the road and risks inappropriate risk taking and recurring boom/bust cycles. This would be counterproductive. ...

Comments

[kthomas]

How does all the offshoring/outsourcing of labor figure into this poductivity figure?

[Bruce Wilder]

"In the late 1990s the primary cause of the productivity growth revival was the dot.com boom and invention of the WWW"

I'm sure the Clinton/Rubin effort to produce a fiscal surplus, and fund a capital investment boom, had nothing whatsoever to do with it.

I really do not understand this insistence on a "trend" productivity disembodied from capital accumulation.

Capital per worker is hard to measure or track, but I'd say there are plenty of indications that it is stagnant or declining in the U.S., undercutting the positive effects of advancing technology.

If we were willing invest more in capital per worker, given the advancing technological possibilities, I'm willing to venture that we would get a big payoff. I think we saw that in the late 1990's.

But, hey, the key is cutting marginal tax rates and running huge deficits, not the opposite.

And, if we have to pretend that trend productivity is a mysterious, magical, disembodied thing to maintain our Republican mythos, we will do it.

[esb]

Bruce Wilder:

So much more fun to "invest" borrowed money in a mountain of consumer goods, sell off property, plant and equipment to pay for them and then educate our progeny in Mandarin, Arabic and Hindi so that they will be able to communicate with the new owners.

Last night Barak Obama opined, "We are the change we have been waiting for."

But actually we are the change that our parents always feared we would be.

[anne]

Bruce Wilder:

"I really do not understand this insistence on a 'trend' productivity disembodied from capital accumulation."

Joseph Stiglitz has copmplained since 2001 of a relative lack of domestic investment, private and public, that analysts continually told us was temperory but has lasted till now. Even with the rising costs of energy consumption, private and public energy research and development and exploration investment was remarkably limited. Public investment in energy research in 2006, was far more than 50% less than in 1979.

[anne]

"Mandarin, Arabic, Hindi, Spanish, Portuguese, Erdu, German, Japanese, Vietnamese...."

Investing in education, especially in education that involves international experience and international broadening and international opportunity is precisely what we need to be doing. Minimal cost public college and university education is precisely what we need.

The Chinese know how important knowing English is. Knowing Chinese is as important.

[knzn]

It seems to me there's a devil of a problem disentangling the business cycle effects from the secular trend in the recent data. Most of the recent productivity bust has had the character of a demand slowdown -- not a recession exactly, not even an "almost recession," but maybe a "slow motion recession." Ssince the 3rd quarter (or the 2nd quarter, by some measures) of 2006, demand growth seems to have been inadequate. I don't think we can call the productivity trend until this business cycle plays out and we come out on the other side.

[anne]

Robert Gordon has long been a productivity pessimist, Brad DeLong an optimist. I am indifferent because data can be noisy for fairly long periods. What I am interested in is encouraging public and private investment, and for public investment I do not mean infinite amount of spending on the definitive tank. Imagine re-directing a trillion dollars and more and more on cursed war and occupation, and wonder at the productive effect.

[anne]

Making us ever more productive, or something....

http://www.nytimes.com/2008/02/06/washington/06cnd-military.html

February 6, 2008

War Costs Next Year Estimated at $170 Billion or More
By DAVID STOUT and THOM SHANKER

WASHINGTON — The military operations in Iraq and Afghanistan could cost $170 billion in the next fiscal year over and above the $515.4 billion regular Pentagon budget that President Bush has proposed, Defense Secretary Robert M. Gates said on Wednesday.

Mr. Gates gave that estimate in testimony before the Senate Armed Services Committee after cautioning the panel that any estimate would be dicey, given the unpredictability of war....

[anne]

Remember, that military spending in the coming year will be much larger since costs such as for our nuclear arsenal, and for private contractors in Iraq and Afghanistan, and for care of veteran casualties are not included in the $685.4 billion figure.

Where then in more than $725 billion will come the meaningul contributions to productivity? There will be a productivity effect, but to what extent?

[anne]

Notice that the expansion from $685.4 billion to $725 billion in military spending is simple in including an estimated $30 billion on the nuclear arsenal and $10 billion on private contractors. I have no sense of the saddening cost of caring for veteran casualties, but the ratio of casualties among returned soldiers is striking.

[More Tools]

Productivity growth was high when inflation was quiescent in the 50s/60ss. Productivity growth fell as inflation rose in the 70s, and trended back up after inflation was tamed by Volker. Now it is again trending down as inflation is rising. GDP growth averaged around 4% from 1870s into the early 1900s, a period of mild deflation.

Keeping inflation constantly positive as "insurance" against the zero bound may actually be slowing long term growth of the economy. Counter cyclical adjustments have moderated economic cycles, but the insistence on "insurance" does not appear to be free. Perhaps a few more tools in the Fed toolbox would obviate the need for zero bound insurance, allowing greater flexibility in policy.

One tool may not be enough to meet 2 mandates in the long run.

[2slugbaits]

KNZN,

Disentangling trend productivity growth from business cycle effects can be pretty tricky, but that's true of other economic variables and not just productivity. Gordon has been blending various trend filters (e.g., H-P filter) to try and sort things out. That said, I once read a paper where Gordon admitted that some of his econometrics was a bit ad hoc.

Anne,

It wasn't all that long ago that Gordon was more optimistic about the sustainability of the productivity boom, so I don't really think it's fair to say he's always been a productivity pessimist. His optimism and pessimism have more or less moved with the evidence.

[Bruce Wilder]

2slugbaits: "His optimism and pessimism have more or less moved with the evidence."

Unmoored to any real analysis, he's been free to do that.

[KIO]

I have compiled a simple figure illustrating relation between productivity growth and labor force participation rate in the USA since 1960.
http://inequalityusa.blogspot.com/2008/02/effect-of-labor-force-growth-on.html

For the sake of better representation, the measured growth rate of labor force participation rate, dLFPRm/LFPRm, has been converted according to the following relationship:
dLFPRc/LFPRc= -2.0dLFPRm/LFPRm + 0.022

Effectively, dLFPRc/LFPRc, is a scaled inverted and shifted dLFPRm/LFPRm.

It is clear from this figure that a 1% increase in dLFPR/LFPR results in a 2% reduction in the rate of productivity growth. Since 2003, the LFPR has been increasing. Therefore, productivity has been growing at a lower rate with corresponding lower long-term trend.

[anne]

"The continuing decline in the productivity growth trend provides further evidence that the productivity growth revival of 1995-2004 was a one-time event."

Robert Gordon has long been a productivity pessimist. There is, however, no convincing explanation as to why such a stance should be justified, and absolutely no reason why public investment designed to increase productivty should not be emphasized.

We are a country that is contentedly squandering hundreds of billions of dollars on destruction, while never worrying whether we might be less productive the more we focus on the economics of destruction.

[anne]

Worrying about productivity 5 and 10 and 20 years from now, America has been immorally spending trillions of dollars on war and occupation, while a supposed productivy specialist never ever wonders just how much American productivty will be increased by the destruction of Iraq. I wonder.

I wonder a lot why a supposed productivty specialist never asks whether the devotion of untold American resources to destruction might have anything to do with productivty.

Let us return now to not thinking of the productivy implications of a $725 billion military budget before the cost of caring for veteran casualties is counted.

[anne]

How productive will spending $170 billion on war in the coming year be? How productive will a $515.4 billion military budget be; how productive $30 billion on our nuclear arsenal; how productive $10 billion for American mercenaries?

We could protect the health of 3.8 million needy Amercian children for less than the cost of providing American mercenaries internationally. Which spending would be more productive?

"Shut the eyes of the dead, not to embarrass anyone."

[anne]

Similarly how productive is spending of $30 billion on a nuclear arsenal, when that includes financing Russian nuclear research and development programs designed to assist, say, Iran?

[spencer]

I calculate an annual series of the growth in real net capital stock per employee that does a great job of forecasting productivity growth in the next year.

Its growth rate has been:

2002...3.3
2003...1.7
2004...0.2
2005..-0.2
2006...0.1

This is not encouraging for productivity growth.

[spencer]

Moreover, compared to earlier cycles in this cycle the growth in hours worked in the productivity data has been significantly weaker than the growth in hours worked in the employment data.

this may imply that we have been overestimating productivity growth this cycle.

[2slugbaits]

Anne,

Unless I'm misreading your post, you appear to be implying that somehow Robert Gordon is opposed to public investments that might increase productivity. It's pretty clear that productivity is not growing as fast as it was five years ago. The question is whether or not there's been some kind of turning point or if the recent downturn is just a fluke. KNZN suggested that the downturn might be due to demand slowdown. The problem with that explanation is that demand slowdowns also reduce labor hours as well as output. In the latest data the hours fell more than output, which is why the productivity numbers were better than expected. Fourth quarter nonfarm business sector productivity rose 1.8 percent, but for all of the 2007 nonfarm productivity only rose 1.6 percent. And note that prior to the downturn productivity growth in 2006 was only 1 percent. So what's actually happening is that the economic downturn is improving measured productivity.

So why might productivity be trending down? One possible answer is capital thinning. This could explain some of the drop, but a lot of the productivity surge from 1995-2005 was due to multifactor productivity; i.e., technology, management skills, working smarter, etc. That's the part of the productivity boom we associate with the internet and personal computers. That seems to be falling off. It's not clear why, but here are two possibilities that come to mind just based on anecdotal experience. One reason might be that there haven't been any really new "killer" business software applications in a long time. But another reason might be a self-inflicted wound coming from the information management gods themselves. As we all know, information management types sincerely believe that the only reason companies exist is to create data in order to populate data warehouses. And the primary goal of all information management directorates is to make sure that no one has access to that data. Ten years ago the risky but freewheeling data environment encouraged people to work remotely and expansively. Today we see that government and businesses are madly throwing up firewalls and cutting off access to data. A lot of people that I know, myself included, no longer check office email from home, no longer work remotely and are frankly less productive than we used to be. It's just too much of a hassle accessing the data.

[anne]

2SB, I agree.

What should be of concern is that private investment has been relatively weak from 2001, while public soft and hard infrastructure investment has been correspondingly weak and has in no way compensated for slow growing private investment. Why productivity growth increased in the 1990s and appears to be slowing this decade was not and is not clear, but the failure to focus on stimulating investment is worrisome.

[anne]

2SB, the information technology perspective you are taking is interesting.

Arguing that the direction in information technology investment and applications has been less conducive to productivity growth needs to be carefully considered. Brad DeLong has cleverly used an extension of Moore's Law to show that information technology productivty growth can continue indefinitely, but this is not arguing that technology investment will grow sufficiently or that applications will induce productivity gains.

[reason]

If I look at that diagram it says to me that trend productivity is pretty flat. There are twenty cycles around that trend however.-)

[reason]

But however, I'm a productivity agnostic. I really don't understand what economy wide productivity is supposed to measure. How much asset inflation (or asset deflation), or rather commissions based on it, is mistakenly measured as something of real value.

[reason]

Oops - word missing ... twenty year cycles ....

[2slugbaits]

Anne,

Right. Brad Delong's argument is that increasing processing speed somehow translates into increaseing productivity. I'm not convinced that this is necessarily true. Using faster processors and memory to pull in more useless graphics for my 16 year old son's games does not help productivity in the workplace. BTW, all that technology has certainly made him less productive when it comes to doing homework.

A lot of the early promises of information technology were based on the idea of having access to data anywhere at anytime. Today we find that DOIMs everywhere are using technology to restrict data access rather than expand data access. The goal of every DOIM today is to ensure no one has FTP capabilities.

[anne]

2SB, your critique is compelling. Nor would I argue with Robert Gordon or Brad DeLong, only wonder with whether we are attending to the magnitude and composition of domestic investment.

Well before China became market driven and Chinese economic growth became evident, there should have been attention given to Chinese invesment in education and public health and agriculture support, which I would argue have allowed the sustained growth in a market driven China.

Investment magnitude and composition matter for productivity is my argument, but we are not focused on investment.

[robertdfeinman]

Using GDP in the productivity equation can give misleading results. After all anything that generates economic activity adds to the GDP, this includes pumping up asset prices artificially as well as the aftermath of Katrina. Nowhere in the calculations is there a place to subtract the loss of infrastructure, only the rebuilding effort.

If Jerome Kerviel had quit in December when he had generated $2 billion in profits his "productivity" would have been counted as very high. Does the GDP now reflect the loss of $7 billion? I don't think so.

Because a few people can swing around a lot of money it appears that productivity is higher than it really is. The real gains were the introduction of computerization and robotics in manufacturing and inventory and customer management. These are now routine so their effect is no longer adding to productivity growth.

People always want to seem to draw to large generalizations from short term phenomena. An enticing prospect for cranking out newspaper columns, but not very useful for making long range policy.

[anne]

Citing Mark Thoma:

http://krugman.blogs.nytimes.com/2008/02/07/sultan-of-smooth/

February 7, 2008

Sultan of Smooth
By Paul Krugman

Michael Mandel * has Robert Gordon’s latest estimate of “trend productivity.” It’s not good.

What is trend productivity? Quarter-to-quarter productivity numbers jump around a lot. Gordon assumes that there’s an underlying trend that only changes gradually, and that most of the quarter-to-quarter variations are random fluctuations around that trend. To extract the “signal,” the underlying trend, from the “noise”, Gordon uses a “smoothing” technique — a Hodrick-Prescott filter, if you want to know, which you don’t.

And what’s happening is this: we keep having quarters of fairly low productivity growth, and Gordon’s filter is gradually coming to the conclusion that there’s been a large decline in the trend. Last quarter’s results, though a bit better than expected, were still low enough to add to the filter’s conviction that the good times have stopped rolling.

That’s a conclusion with many implications — among other things, a lot of America’s economic triumphalism was based on the productivity boom, so if it’s over, we need to do some serious rethinking.

[Chart]

This chart shows rate of change, not level. So the Reagan-Bush I years are bad, not good — low productivity growth throughout, although slightly better at the end than at the beginning.

* http://www.businessweek.com/the_thread/economicsunbound/archives/2008/02/bob_gordon_has.html

[anne]

"So the Reagan-Bush I years are bad, not good — low productivity growth throughout, although slightly better at the end than at the beginning."

After all, the information technology "revolution" surely did not begin in the 1990s. What made the Bill Clinton Presidency different in terms of productivity growth. Was fiscal policy of no account? Was a "peace dividend" that allowed for a relative re-direction of investment emphasis of no account?

[anne]

Does having trillions of dollars in resources tragically spent on destruction make a productivity difference? When we are so pleased about dropping precisely 40,000 or 100,000 pounds of bombs on Iraq, what has been the cost and where is the productivity, though the bombs may have been improved bombs I suppose? Where is the productivity in building anti- anti- missile missiles in Poland, when infant development is increasingly questionalbe in Mississippi and infant development will have a lot to do with productivity though in ways I do not well understand.

[2slugbaits]

Anne,

First, since Krugman points out that we don't want to know about the Hodrick-Prescott filter that Gordon uses, I suppose I should point out some other information that we don't want to know. That filter depends upon a smoothing factor (called a "lambda"). What's unique (and probably ad hoc) is the way Gordon estimates that lambda value. It's a clever if not altogether rigourous estimation.

Greater capital investment would increase productivity, and lately there's been a lot of capital thinning. It shows up in the BLS stats. I believe the latest BLS data on factor productivity shows that increased capital intensity only accounted for 0.3 percentage points, which is well under half of what's normal. But what Gordon is mainly after is the multifactor component of productivity, which is about innovation, technology and intangibles. It's the residual productivity after you take out labor and capital inputs.

[reason]

Seriously though, isn't this a Schumpeterian graph? Waves of technology followed by lulls. And a pretty consistant 2.0% as the basis around which this all fluctuates. To me it jumps out.

[anne]

2SB, I understand. What makes for productivity growth through time is simply not clear enough, but public and private investment is essential and we are short of both and I would argue that in particular public investment that might provide for productivity growth has been squeezed out by military spending.