Patents Tell An Upbeat Story

Technology is driving productivity

Can the U.S. continue to post faster-than-average economic growth and healthy increases in business profits without setting off inflation alarms? One economist who thinks it can is Maury Harris of PaineWebber Inc., who points to the continuing surge in U.S. patent applications as evidence that the economy is undergoing a productivity transformation that promises to accommodate both wage and profit gains while containing price pressures.

Many economic observers have argued that the widespread use of computers, along with other technological advances, has revitalized the nation's long-depressed productivity performance. Yet the reported average annual gain in productivity through most of the current expansion has been a paltry 1%. It is only in the past year or so that the pace has quickened significantly, averaging 2.7% through the first three quarters of 1997.

This pickup, which is highly unusual in the late stages of an expansion, suggests that changing technology may finally be starting to bolster the productivity numbers. Noting that economists generally credit technological progress with producing more than a third of productivity gains earlier in the century, Harris argues that the rising pace of patent applications indicates that it is exerting a similar influence today. So far in the 1990s, he notes, patent applications are running more than 50% above their pace in the 1980s (chart).

Reinforcing the view that U.S. business is increasingly focused on reaping the fruits of scientific advancements are a host of related developments--from the recent capital-spending boom to the strength of business research and development outlays--which are up around 10% a year since 1994--to the doubling of venture-capital commitments since 1995. In addition, the ongoing cutbacks in defense spending appear to be reallocating scientific talent to commercial projects.

If Harris is right in his belief that patent activity is a leading indicator of productivity gains, than the recent pickup in productivity growth should last for quite a while. Since 1995, the pace of applications received by the patent office has zoomed to nearly 204,000 a year. That's up from 173,000 earlier in the decade and less than 120,000 a year in the 1980s.

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