Productivity: How to Read the Numbers
It is now clear that productivity growth for the U.S. economy in the fourth quarter of last year rose 3.7%. This is extraordinary, especially so late in a business cycle that is now officially the longest peacetime expansion in U.S. history. For the past three years, productivity growth has averaged 2%, almost double the rate of the '70s and '80s. The big question is whether the U.S. is returning to, or even exceeding, its historic trend of 2% annual increases in productivity. The stakes are high. As any observer of the American economy can see, big productivity gains deliver terrific growth, low inflation, rising real wages, and low unemployment--the best of all possible worlds.
But the numbers aren't conclusive. There have been four three-year periods in the past 30 years when productivity growth averaged 2% only to dip back below that. Is the 1996-98 period one of these bumps, or is it part of a sustained era of high productivity growth? We can't be sure just yet.
Two tests ahead could possibly answer the question. The first is the most obvious. The strongest evidence that productivity has hit a higher level is the length and strength of the economic expansion itself. If it continues for another year--and so far, it looks like it will--the economy will set the record for the longest expansion ever. Big increases in capital spending, housing, and autos coupled with low inflation so late in the business cycle already prove that this expansion is very unusual. A fourth year of productivity at 2%-plus will strongly suggest that the transition to a new high-tech economy has boosted the trend rate of productivity growth.
A second test would be to see if the higher productivity level can sustain itself through an economic slowdown. Productivity has done well in the past three years, in part, because of the extraordinary strength of the economy. If it can remain relatively high during a downturn in the business cycle, we would know something has really changed.
Either way, 1999 is a key year for the productivity debate. Boom or bust, the answer will become much clearer. Our best guess? The surge in U.S. productivity is no fluke.