The New Economy puzzle is slowly being solved. When did the U.S. shift to a higher level of sustainable growth? Are these 3%-to-4% growth rates the result of temporary factors that will disappear soon? Why have CEOs been saying corporate productivity is rising sharply--while government statistics show them up just a bit? Data just released by the Commerce Dept.'s Bureau of Economic Analysis (BEA) don't answer all these questions definitively but do support the view that the New Economy is changing the economic landscape dramatically--a position long held by BUSINESS WEEK.
A comprehensive revision of historical data by the BEA shows that government accounting is catching up with reality. According to calculations by BUSINESS WEEK based on the new data, nonfarm productivity from 1990 to 1998 grew at a rate of 2%, not 1.4% as previously reported. From 1995 to 1998, productivity grew even faster: 2.6%, not 1.9%. And growth of gross domestic product for the entire economy was actually 4.2% between 1995 and 1998, not 3.8%. Recent figures show these trends probably extended well into 1999.
The point? It appears that the safe speed limit for U.S. growth moved higher much earlier in the decade than previously thought. The revisions show that between 1990 and 1994, productivity rose at a 1.8% rate, not the limp 1.1% previously reported. This implies that the New Economy appears to have been born in the early 1990s, the stage at which corporations say they began investing mightily in computers and high technology. Productivity and economic growth also appear to have accelerated over the decade.
The BEA revisions refute skeptics who say that the fast, noninflationary growth of recent years is because of temporary factors, such as the Asian crisis or low commodity prices, which are now reversing. The transition to the New Economy began long before these events and should probably outlast them. A recent study by the University of Texas, sponsored by Cisco Systems Inc., shows that the Internet economy grew 68% from the first quarter of 1998 to the first quarter of 1999. It will total $507 billion this year.
The BEA figures validate the New Economy idea of higher sustainable growth. They don't, of course, suggest that inflation is dead, that business cycles are history, or that Fed policymakers can take the day off. But they do suggest that America doesn't have to be afraid of growing faster.