A Productivity Led Recovery Spells `Joyless Prosperity'

There's a silver lining in the current cloudy employment outlook, contends economist Stephen S. Roach of Morgan Stanley & Co. "The U.S.," he says, "is now entering its first productivity-led recovery since the early 1960s."

Corporate restructuring, which reshaped U.S. manufacturing in the 1980s, has recently been spreading like wildfire through the nation's vast service sector, observes Roach. And an initial payoff in productivity is already apparent. In the six quarters following the last business-cycle peak in mid-1990, nonfarm business output per hour has grown at a 0.8% annual pace--about half a percentage point faster than the comparable period in the early 1980s. Moreover, most of this improved efficiency occurred in the service sector, where productivity posted a 0.7% rise last year.

The negative aspect of this trend is a sharp slowdown in services employment. After exploding during the past expansion, service jobs have been moving sideways since 1989 (chart). They are expected to grow far more slowly in the current upturn--as restructured companies stress productivity and as the huge surge in demand for services unleashed by the baby boomers' coming of age fades into history. For many households, says Roach, the years ahead are likely to be a period of relatively high unemployment and "joyless prosperity."

Meanwhile, service industries, which accounted for an astonishing 85% of business purchases of information technology in the past decade, have been paring their work forces in a drive to reap productivity gains from their huge investment. "Continuing pressures from international competition, deregulation, and slower demand growth will reinforce this effort," says Roach.

The payoff could come soon. Overall private-sector productivity should rise at a 1.5% rate in the next few years, predicts Roach, double its anemic 1980s' pace. And faster productivity growth implies reduced cost pressures, less inflation, lower interest rates, and improved corporate profit margins.

While household incomes and consumption will lag behind the pace of earlier, employment-driven recoveries, says Roach, manufacturing should still thrive as it responds to rising exports and capital investment. Indeed, he notes that services plan to boost their capital spending by 8% this year--"a sign that the sector is raising its bet on achieving productivity breakthroughs."

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