To All: Seems like the rest of the world is catching up with the correct analysis of how the new economy is working.
Achieving a soft landing is the Federal Reserve’s job, and Chairman Alan Greenspan has often said that is what he aims to do to bring supply and demand back into balance. But, along with most private-sector economists, the Fed in recent years has underestimated the economy’s potential to grow without sparking inflation. In large measure this is because they have underestimated gains in productivity from the technology boom.
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This week’s report that nonfarm business productivity grew at an annual rate of 5.3% last quarter, allowing production costs per worker to fall for the first time in 16 years, threw another wrench into calculations about a soft landing. The increase in productivity accelerates a trend that began in the last decade: After growing at 1.6% annually between 1990 and 1994, productivity, or output per worker, has been rising at almost 2.4% a year since 1995 as companies poured money into technology to make workers more efficient. If such a rate holds up, the economy can grow faster without fear of inflation.
A soft landing, says Bruce Steinberg, chief economist at Merrill Lynch, “is a little bit in the eye of the beholder.” And since the beholder who matters most is the Fed, he suggests looking for a 4% growth rate and 4% unemployment with little increase in the rate of inflation. “The growth rate that matters is what the Fed has thrown out there,” he says.
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Not so, say economists who believe the Fed is overly conservative. The surge in productivity “means the economy is still taking off,” says Lawrence Kudlow, chief U.S. economist for ING Barings LLC and a persistent critic of the Fed’s fine-tuning policy. “There’s no need to land it.” |
