washingtonpost.com
Productivity Takes Surprise Jump
Report Bolsters View That New Economic Era Has Begun
By Paul Blustein
Washington Post Staff Writer
Wednesday, August 8, 2001; Page A01
Government figures released yesterday provided potent ammunition for those who believe the U.S. economy has entered a new era in which technology and a more flexible labor market are making American companies more productive than before.
The Bureau of Labor Statistics reported that productivity -- which measures output per hour worked -- grew at an unexpectedly strong 2.5 percent rate in the second quarter, compared with a revised 0.1 percent rate in the previous quarter.
In large part, the improved efficiency in the April-June period resulted from companies' laying off workers and cutting work hours to bring labor costs into line with sluggish demand for their goods. But companies were able to increase overall national production slightly even with reduced workforces -- and the higher productivity figure didn't fit the usual pattern for recessions and slowdowns, when productivity typically begins to fall.
Furthermore, revised figures for 1998 through 2000 showed that productivity rose at an annual rate of 2.6 percent during that period. That is a bit lower than the 3.2 percent annual rate originally estimated, but it is still well above the pace recorded during most of the 1970s, '80s and early '90s. And it is robust enough to ease the concerns, voiced by some new-economy skeptics, that the productivity gains of recent years were illusory.
"If you believed before that there was some fundamental change in the way the economy functions, you should believe it still," said Neal Soss, an economist with Credit Suisse First Boston in New York.
The question of whether productivity shifted into higher gear in the late 1990s has been a hotly contested and important one for economists and policymakers. With higher productivity, living standards can rise more rapidly because companies can offer their workers more generous wage increases without worrying so much about higher costs, because increased output offsets increased wage bills.
Even with rising productivity, the new economy remains vulnerable to ups and downs, as has been apparent during the recent months of extremely weak economic growth, layoffs, falling profits and sagging stock prices. But productivity gains can translate over the long term into higher rates of economic expansion without inflation.
That has major implications for the Federal Reserve's interest rate policy. Fed Chairman Alan Greenspan, who believes that advances in technology have greatly enhanced U.S. corporate efficiency in recent years, has cited this phenomenon as a major justification for the central bank's low-interest-rate policy. The theory is that because companies' productivity is greater, they needn't raise prices as much to cover increased labor costs, so the danger of rekindled inflation has receded.
Productivity numbers are notoriously subject to computational problems, and some analysts and policymakers have voiced doubts about whether increased productivity growth represents a solid trend or is merely an ephemeral statistical blip. Yesterday's figures bolstered the believers in productivity growth rather than the doubters.
Recessions and slowdowns normally cause productivity to decline because output falls faster than companies cut their payrolls. But the 2.5 percent increase in the second quarter, which applied to non-farm businesses, was not only positive; it was a full percentage point higher than many economists had forecast.
Moreover, the original estimate of productivity growth in the first quarter was revised from a 1.2 percent decline to a 0.1 percent gain, noted Brian Jones, an economist at Salomon Smith Barney Inc. "So even the one observation [the skeptics] had to hang their hat on doesn't exist anymore."
Layoffs and cutbacks in work hours were a big part of the story, as the total number of hours worked fell 2.4 percent in the second quarter. To some extent, that reflected companies' dismissal of temporary workers they had hired during boom times, although temporary workers are far from the only ones affected.
"It's across the board -- it's layoffs, downsizing, sabbaticals -- it's every which way a company can do to reduce its workforce after eight years of bloating itself," said Jeffrey Joerres, president of Manpower Inc., a temporary employment services company.
Still, the economy continued to grow over the past several quarters despite the reduction in hours worked because productivity growth is increasing. "That's not the normal response you get in the kind of slowdown that we've gone through," noted Jones of Salomon Smith Barney.
The 2.6 percent growth in productivity for 1998-2000, he added, implies that the economy can now grow at about 3.5 percent a year without generating inflationary pressure, after the 1 percent annual increase in the labor force is added to productivity growth. "That's well above what a lot of prior estimates had been" of the economy's potential growth, Jones said.
But some analysts warned that the figures released yesterday don't bear out the most optimistic claims about the new economy.
"It certainly is good news for those who believed we have structurally changed productivity growth," said Diane Swonk, chief economist at Bank One in Chicago. "And it supports Greenspan's continual optimism" about the subject. But, she said, the figures do not support the view, espoused by some new-economy enthusiasts, that the economy now has a long-term potential growth rate of 4 percent to 4.5 percent. "It's probably closer to 3 percent to 3 1/2 percent," Swonk said. |
