Productivity Still Gaining Despite Slump
August 8, 2001
By DAVID LEONHARDT
New York Times
Even in a sharp economic slowdown, the new economy seems to be surviving. It just may not be as big a deal as many of its most optimistic proponents had predicted.
In the second quarter of this year, companies managed to become more efficient despite the near absence of economic growth, the government reported yesterday. That unusual feat offers further evidence that, with the help of technology, the economy has emerged from a 20-year productivity slump that began in the mid- 1970's and contributed to a decline in inflation-adjusted wages for most workers, economists said.
Nonfarm productivity rose at a healthy 2.5 percent annual rate in the quarter, as businesses produced roughly the same output using less labor, the Labor Department said. The growth was similar to the rate during the boom years of the late 1990's and significantly higher than the 1.5 percent average during the previous 20 years.
Productivity — the amount that a worker produces in an hour — is considered one of the most important government statistics because it indicates how quickly the economy can grow over a long period. When productivity rises rapidly, both corporate profits and workers' earnings can grow without causing inflation to accelerate.
But the Labor Department also gave some reason for caution yesterday, saying that it had overestimated productivity growth in the three previous years. The productivity gains of the late 90's now look less impressive than those of the 1960's to mid-70's, when people flocked to universities and the government built new highways and airports.
From 1997 until 2000, productivity grew 2.6 percent, not 3.2 percent, as the government had initially reported in March.
"Everybody is giving a little haircut to their long-run growth projections," said Ethan Harris, a senior economist with Lehman Brothers (news/quote). But, he added, "by no means does this overturn the idea of a new paradigm of higher productivity growth."
Productivity typically increases in an economic expansion, as companies try to make enough products to meet rising demand, and economists have been engaged in a detailed debate about whether the recent increases would outlast the cycle.
The second quarter offered support to the optimists, who include Alan Greenspan, chairman of the Federal Reserve. The 2.5 percent increase was a significant improvement over the gain in the first three months of the year, when productivity rose just 0.1 percent. (The government had initially said that it fell 1.2 percent in the first quarter but reported the new number yesterday as part of its regular revisions.)
In recent months, companies became more efficient by dismissing employees or reducing the number of hours they worked, while sustaining virtually the same level of output. They have been announcing large layoffs since late last year, but only since March has the overall number of jobs in the American economy been declining, as early budget cutters, like Whirlpool, actually made their layoffs and other companies, like Eastman Kodak (news/quote), followed.
Because unemployment remains historically low, inflation-adjusted hourly compensation still rose 1.6 percent, on annual basis, in the second quarter, the government said yesterday. But pay growth has slowed from the roughly 3 percent annual gain between 1997 and 2000 — the best three-year period for workers since the late 1960's.
If the productivity gains are more than a cyclical phenomenon, and do reflect a country made more efficient by computers and the Internet, the long-term average growth of the economy may be about 3.5 percent, economists said. Previously, many analysts believed it was closer to 3 percent and that inflation would accelerate once growth exceeded that mark.
As believers in the new economy, Mr. Greenspan and his colleagues at the Fed decided not to raise interest rates during much of the late 90's, even as growth accelerated. In speeches, some members of the Fed have said that they were able to cut interest rates rapidly over the last seven months because the new economy made inflation less of an immediate threat.
"By all of the evaluations that we make, we are only part way through a technological expansion," Mr. Greenspan said last month, while testifying before the Senate. That expansion will keep productivity growth strong, he said.
Still, recent data has brought some warning signs. Earlier this month, the government said that companies' investment in new equipment and software had fallen 14.5 percent in the second quarter, the worst decline in 19 years.
Many economists saw the investment in equipment and software as the force behind the efficiency gains. As companies cut back, those gains could recede, said Joel Prakken, the chairman of Macroeconomic Advisers, a consulting firm in St. Louis.
"There's a pretty significant change here," Mr. Prakken said. "The economy's growth potential is somewhat lower than we thought." |
