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Wednesday, February 06, 2008

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:

Gordonproductivity

...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. ...

    Posted by on Wednesday, February 6, 2008 at 02:23 PM in Economics, Productivity | Permalink  TrackBack (0)  Comments (88)

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