More Evidence Of A New Economy
Evidence is mounting that productivity growth is returning to the level of the golden 1950s and 1960s. Recent government data show productivity growing about 2% for the past two years, twice the rate of the past two decades. If sustained, the long-term, U.S. noninflationary growth rate would be closer to 3 1/2% than 2 1/2%, with all that implies for wages, profits, and unemployment. The stock market is already rejoicing. On the same day the Bureau of Labor Statistics released its numbers, the Standard & Poor's 500-stock index and Dow Jones industrial average hit record highs.
The 2% rise in productivity in the fourth quarter of 1997 was a stunning surprise. Most economists expected a much lower 0.7%. But the more important move was the quiet revision in the same BLS report of the 1996 productivity growth figure to 1.9%, from 1.3%. Surges in productivity have occurred many times in the past 20 years, but they were always associated with bounce-backs from recessions. This is the first time that a two-year, back-to-back productivity boom of nearly 2% has taken place well into an extended economic expansion. Indeed, manufacturing productivity is actually accelerating, from 3.2% in 1995 and 3.7% in 1996, to 4% last year.
This is good news. For too many years, economists have said their models mandated a modest growth rate of 2% to 2.5% and a jobless rate of 6% if inflation was to be contained. The explanation was simple. With a roughly 1% annual increase in the labor force and an anemic 1% productivity rise, the economy could not grow much faster without generating inflation. This iron rule, expressed in the arcane language of the Phillips curve and NAIRU, placed a dark cloud over America's future and the opportunities it could offer its people.
BUSINESS WEEK has argued for some time that a New Economy was taking shape that could deliver higher growth with low inflation. Business cycles can't be repealed, inflation can't be banned, and the stock market isn't destined to rise forever. But thanks to trade and technology the shape of economic expansion can change--for the better. There can be more jobs for people moving off welfare, the young, single parents, the elderly, and everybody else. There can be more profits for investment and shareholders. There can be more revenues to balance the budget (enough to even cut taxes). This has, in fact, been the reality of the past three years.
What has been missing from the New Economy argument, until now, has been statistical evidence. If globalization and technology are boosting efficiency, then productivity growth should be high and last well into the business cycle. Until the BLS revision, official data offered no strong evidence of this. Or not much. CEOs insisted productivity was rising. Federal Reserve Board Chairman Alan Greenspan believed so as well. But the stats were squishy. Now, they are more robust.
What changed in the figures? Based on fresh data, the BLS has concluded that its original numbers overstated the number of hours actually worked by employees. Since productivity is all about delivering more output per unit of work time, fewer hours worked means higher measured productivity. They were producing more in less time.
It is still possible that the productivity surge is cyclical and will disappear. Most economists concede that established models cannot explain the events of the past three years. Yet by and large, they believe that special factors, such as a rising dollar, declining commodity prices, and worker anxiety are responsible for the above-trend noninflationary growth in the U.S., not the New Economy paradigm.
Perhaps they will turn out to be right. But for now, the onus of proof is shifting onto their shoulders. The new data on productivity strengthen the New Economy argument. So keep an eye on the productivity numbers in the months ahead, especially if the economy slows. If productivity growth continues to clock in at around 2%, then BUSINESS WEEK, Greenspan, and many top CEOs are right, and the economy, after a 25-year hiatus, is back in the fast lane.