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Thursday, September 28, 2006

Is Productivity Growth Slowing?

Today, second quarter GDP growth was revised downward from 2.9% to 2.6%. Dean Baker explains how this might impact measures of productivity:

Is Productivity Growth Slowing?, by Dean Baker: The news reports on the release of revised data for 2nd quarter GDP missed the fact that output in the nonfarm business sector was revised down by 0.4 percentage points. This means that (ignoring rounding) productivity growth for the quarter should also be lowered by 0.4 pp to a 1.2 percent annual rate. At this point, the consensus estimate for 3rd quarter GDP growth is about 2.5 percent, which translates into a 1.5 percent rate of productivity growth, assuming hours grow at a modest 1 percent annual rate.

Productivity growth has clearly slowed from its extraordinary 3.6 percent annual rate over the years 2002-04. If the third quarter growth comes in at close to 1.5 percent, then the year over year rate (3rd quarter 2005 to 3rd quarter 2006) would be under 2.0 percent. That would be news.

Update: How much does R&D contribute to productivity and economic growth?:

Economists Put a Number on R&D, by Greg Ip and Mark Whitehouse, WSJ: That research and development makes an important contribution to U.S. economic growth has long been obvious. But in an important advance, the nation's economic scorekeepers declared they can now measure that contribution and found that it is increasing. ...

In the current system of measuring gross domestic product, R&D is treated like a so-called intermediate expense. For example, salaries paid to research scientists are lumped in with wages paid to assembly-line workers. Under the new approach ..., R&D spending is treated like capital investment, such as the cost of a machine tool or an office building. By that measure, R&D would have accounted for nearly 7% of growth from 1995 to 2002, up from a little more than 4% from 1959 to 1994. (The rest comes from an expanding work force, increased capital and other, unexplained factors.) That exceeds by a wide margin the 2% contribution of investment in buildings and factories during the 1959-2002 period.

Treating R&D as an investment would make the economy 3% larger and the national savings rate about two percentage points higher. ...

Since the 1950s, economists have explained economic output as the result of measurable inputs. Any increase in output that can't be explained by capital and labor is called "multifactor productivity" or "the Solow residual," after Robert Solow, the Nobel-prize winning economist considered the father of modern growth theory.

Between 1959 and 2002, this factor accounted for about 20% of U.S. growth. Between 1995 and 2002, when productivity growth accelerated sharply, that grew to about 33%. Accounting for R&D would explain about one fifth, by some measures, of the productivity mystery. It suggests companies have been investing more than the official data had previously shown -- a good omen for future economic growth. "The slump in investment is not as drastic as people thought before they saw these figures," says Dale Jorgenson, professor of economics at Harvard University.

Mr. Jorgenson noted a lot of the multifactor productivity growth remains unexplained. "The great mystery of growth...is not eliminated."

Paul Romer, an economics professor at Stanford Business School, said the better the measurements of R&D become, the more economists and policy makers will realize other factors may be more important. "If you look at why we had rapid productivity growth in big-box retailing, there were lots of intangibles and ideas that...don't get recorded as R&D."

BEA director Steve Landefeld said for now, GDP will continue to be measured in the typical way, but the agency plans to start including R&D regularly in 2012. ...

    Posted by on Thursday, September 28, 2006 at 05:00 PM in Economics | Permalink  TrackBack (0)  Comments (12)

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