The Recovery That Defied the Forecasts of Economists
By DANIEL ALTMAN
nytimes.com
The economy's quick recovery from recession, evinced by the latest reports from the Commerce Department and the Federal Reserve, has taken many experienced forecasters by surprise.
Their favorite explanation has been the unexpected resilience of consumers after the shock of Sept. 11. Yet at the end of last year, strong gains in productivity — the amount of goods the average American worker produces in an hour — also played an important and largely ignored role.
Yesterday, the Commerce Department released new figures showing a pickup of 1.6 percent in orders for manufactured goods in January, after an increase of 0.7 percent in December. Last week, the department revised its estimate of growth in gross domestic product for the final quarter of last year to 1.4 percent from 0.2 percent.
The beige book of reports from the Federal Reserve's 12 districts, also released yesterday, described more signs of improvement in manufacturing, especially along the Eastern Seaboard and in auto- producing states like Michigan and Ohio. On the retail side, sales of home furnishings and appliances began to gain momentum in the Midwest. Though vacancies grew in commercial real estate across the country, home sales remained strong.
The Fed reported little change in labor markets, where employers cut bonuses and delayed raises in January and February. Contrary to the expectations of economists, however, the Fed's contacts hinted that the economy would soon start creating more jobs than it lost.
Even though the private sector has shed more than a million jobs, companies have still managed to turn out the goods and services consumers want, at prices they can afford, because of rising productivity.
Forecasters who doubted the economy's ability to grow at the end of last year may not have taken into account the effects of productivity because its growth was so unusual.
"If productivity grows, the economy does well," said Edward C. Prescott, a professor at the University of Minnesota and senior adviser to the Federal Reserve Bank of Minneapolis. Mr. Prescott contended that Wall Street's seers did not pay enough attention to productivity.
"I don't think they had a good basis for their forecasts," Professor Prescott said. "Sometimes pessimism or optimism gets popular, and it's contagious."
Rising productivity has enabled many companies to meet demand for their products even while reducing their work forces. "It's certainly been helpful in how we do our restructuring in ensuring that we be as cost effective as we can," said Martha Depenbrock, a spokeswoman for Procter & Gamble (news/quote), which laid off 10,000 people last year.
Ms. Depenbrock said that Web- based management of payrolls, for example, had cut costs and freed time for other activities. The company has also achieved productivity gains — and cost savings of $1 billion — with a new method for developing manufacturing systems, she said. Procter & Gamble has already licensed the system to other businesses.
Rising productivity is by no means routine in a recession. "Productivity has stayed reasonably strong throughout, which is not your typical pattern," said Robert E. Litan, director of economic studies at the Brookings Institution.
During the last 30 years, the average annual growth rate of productivity in all quarters was 1.7 percent. In quarters that included periods of recessions, as identified by the National Bureau of Economic Research, productivity shrank at an average annual rate of 0.35 percent. Yet in the three quarters since the most recent recession began in March 2001, productivity has clocked annual growth rates of 2.1 percent, 1.1 percent and 3.5 percent.
That last figure could be adjusted higher this morning, when the Labor Department releases its final estimates for the fourth quarter. Last week's upward revision of growth in gross domestic product for the fourth quarter suggests that workers were even more productive than initially thought.
"The productivity numbers have been holding up quite well," said Professor Prescott. "I suspect they'll be even higher with this revision in G.D.P. growth."
Productivity affects companies' ability to supply diverse goods and services at low prices. But in the last several months, most analysts concentrated on the demand side of the economy's grand equation, with a particular focus on the consumer. They still predicted that recovery would be slow to arrive.
Debating the economy's prospects after the terrorist attacks last September, the top forecasters at J. P. Morgan Chase (news/quote) decided that consumers were likely to retrench, said James E. Glassman, the bank's senior United States economist. In mid- December, J. P. Morgan Chase was predicting that the economy would contract by 2 percent in the fourth quarter. Other forecasts were more upbeat, but few predicted anything like the actual figure of 1.4 percent growth.
"It looks to me like that event just encouraged them to keep doing what they always do," Mr. Glassman said of consumers after Sept. 11. "There is a psychological dimension, and I think some clever companies figured out how to tap into this."
He called the "Keep America Rolling" slogan used by Chevrolet, a division of General Motors (news/quote), particularly ingenious and perhaps a distraction from hard financial information. "I'm not sure the deals you got were that great when you walked away from the lot," he said.
Wall Street forecasters may also have overestimated consumers' reaction to the huge destruction of shareholder wealth in the stock markets last year. "Some, say on Wall Street, seemed to extrapolate their own portfolios to the rest of the population," said Dean M. Maki, an economist at Putnam Investments who studied the effects of changes in wealth while at the Federal Reserve. "The typical Wal-Mart (news/quote) shopper isn't affected very much one way or another by the way the stock market goes, whereas the typical Tiffany shopper probably is."
Improvements in productivity, even during a recession, can have lasting benefits. Businesses that try to do more with less can learn valuable lessons for helping productivity in the future, Mr. Litan of Brookings said. Companies do not forget how to make workers more efficient once a recession ends, he said.
The strong growth in productivity in the fourth quarter may not last, however.
"There's not strong empirical evidence that the productivity growth rate will stay up there," Professor Prescott said. "I expect it to stay on its trend, which is that nice 2 percent a year."
Productivity growth is hard to predict, he added. For example, a theory that was once popular stated that the gains from the technological discoveries of the 1970's, when productivity growth slinked along at less than 2 percent, did not show up until the technologies became part of business practices in the 1990's. But the theory worked only for some countries.
"Some people have argued that some new things come along and it takes a while before you can really exploit them," Professor Prescott said.
"If there's a slingshot, why didn't Japan do well when the United States and Europe were doing well?" |
