Productivity Leap of 8.6%--Shows Economy's Potential--
I've been thinking about this Productivity question, We've looked at several insightful articles by Stephen Roach this past year and he's written eloquently and suggested that the Productivity increases of the 1990's may have been vastly overstated or at least quite a bit.
As I reflect on my own experience, We are seeing a huge acceleration in productivity due to the Trifecta Triumvarate of the Semiconductor chip, Exponentially increasing Computer processing speeds, and the rise and deployment of the Internet.
The below WSJ article is too simplistic in one of it's premises. The question is asked whether the productivity growth of the 1990's was a fluke and we will fall back into the lower productivity growth pattern of the 1970's or will we see the productivity increases of the 1950's.
The technological and productivity increases and advances have been stupendous in every decade of the 20th century. The economic turbulence and hard times of the 1970's was due to the global turbulence in the world currency markets and the oil price shocks which were caused by the collapse of the Bretton Woods Monetary Pact of 1944. The rampant price inflation in the global MacroEconomic system was due to the huge expansion of the Monetary Base and the Monetary Aggregates in the US, Britain and several other countries.
The US Government went on a very vigorous deficit spending program which was made necessary by the spending of the Vietnamese War, and the Extensive expansion of the Great Society Programs of the LBJ Administration.
The US had to be the global growth driver after the devastation of WWII and it makes sense that in working to create prosperity around the world ( and the US has lead the most successful version in history of the expansion of standards of living after WWII) The US would overshoot the trendline growth potential of non inflationary economic growth.
Many economists felt that the generous help that the Marshall Plan gave to Europe and to Japan would create a destabilizing debt build up, but in fact it was a very successful enterprise as it created a virtuous cycle of germinating the seed of economic growth which then created more growth.
John
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By PATRICK BARTA and ANDREW CAFFREY
Staff Reporters of THE WALL STREET JOURNAL
May 8, 2002
The U.S. economy's productivity growth surged in the first quarter at its fastest pace in nearly two decades. The report offered a sign the U.S. might be able to return to the robust growth of the 1990s once the downturn conclusively ends.
While many corporate executives, workers and investors still feel the recession's gloom, the Labor Department report that productivity soared at an 8.6% seasonally adjusted annual rate in the first part of 2002 painted a brighter picture.
Because it's a measure of how efficiently companies operate, productivity essentially determines how fast economic output and workers' pay can grow over the long run without triggering inflation. Economists generally believe that during the 1990s, rising productivity -- fueled by technology spending, deregulation and globalization -- had much to do with the U.S. economic boom.
A big question hanging over the economy for the past year: Was the 1990s productivity surge a fluke, to be washed away by recession? Or was it a fundamental change -- a return to the golden days of the 1950s and 1960s and a shift away from the languid 1970s?
Tuesday's numbers, following a string of positive productivity figures throughout the recession, suggested that at least some portion of the new efficiency was permanent. The figures indicated that over the long haul, gross domestic product could grow at about 4% a year, well above the 2% or so that's long been thought of as the maximum noninflationary growth rate.
The quarterly productivity estimates tend to bounce around sharply from quarter to quarter and are subject to big revisions. Productivity often soars when an economy is just pulling out of a slump, because payrolls have been cut and the remaining staff tends to be the most skilled. Companies also are often sitting with underused factories they can rev up to meet any rise in demand cheaply. Even Federal Reserve Chairman Alan Greenspan, one of the most bullish productivity believers, has said the recent productivity numbers are "somewhat suspiciously too strong."
But economists are impressed by the fact that productivity has remained strong through the downturn of the past year. Productivity usually declines or stays flat during recessions as companies initially cut production faster than they shed workers. Instead, over the past four quarters, productivity has grown 4.2%.
During the boom, the U.S. didn't "have a real test of how the structural productivity would respond when the economy weakened," Mr. Greenspan told Congress in March. "Now we have been through a period like that," he noted, and "we are getting increasing confirmation that something did fundamentally important happen in the latter part of the 1990s, and it does give some confidence projecting forward."
For the near term, the report is a mixed blessing, as economists try to figure out just how quickly the economy might pull out of the recession and return to robust growth. The good news, for companies: Accelerating productivity suggests they have considerable power to boost stagnant profits -- one of the things still clouding business spending and financial markets. Higher productivity means companies can produce more with fewer workers. As part of its productivity report, the Labor Department said that labor costs for each unit of output fell at a 5.4% annualized rate, the steepest drop in nearly 20 years.
The productivity numbers suggest "you will see profits pick up over the next few quarters, and that will help sustain recovery," said Martin Baily, a chairman of the Council of Economic Advisers in the Clinton years.
But because companies can get by with fewer workers, they probably will do just that for some time to come, especially since demand for goods and services remains sluggish.
When demand was strong through the late 1990s, accelerating productivity didn't restrain employment. Output surged, and companies hired freely. But with demand still weak, businesses are using their new efficiencies to maintain production while continuing to keep a tight rein on payrolls.
That increases the risk that the next several quarters could resemble the "jobless recovery" of the early 1990s, when the economy pulled out of a recession without a surge in new jobs. Last week, the Labor Department said unemployment jumped to 6% in April from 5.7% in March, the highest in nearly eight years, even as more and more economists concluded the recession had ended.
While the productivity reports have made economists even more optimistic, many chief executives -- on the whole, notably more downbeat than forecasters -- are using that efficiency to make further cuts. Rohm & Haas Co., a Philadelphia chemical and specialty-materials company, projects that its own productivity, as measured by sales per employee, will increase 3% to 3.5% this year. It expects to meet the goal in part by eliminating 600 jobs by the end of this year, after having cut 1,100 and closed five plants in the U.S. over the past year.
Rohm & Haas says it needs to shrink in response to the economic weakness. "Even with the return of normal business conditions," says Rohm & Haas President J. Michael Fitzpatrick, "we would be able to handle the additional workload coming in without additional hiring."
The stock market responded to Tuesday's economic news with little enthusiasm. The Dow Jones Industrial Average rose 28.51 points to close at 9836.55, while the Nasdaq Composite Index slipped 4.66 points to 1573.82.
Not even the most optimistic economists think productivity can keep rising at the torrid first-quarter pace. Economists generally believe the economy's "speed limit" is the total of the rate of productivity growth added to the rate of population growth, which is about 1%. Tuesday's report would suggest the economy could expand at an annual pace of nearly 10%, well more than double what most economists consider the real top growth rate.
Donnelly Corp., an auto-parts maker in Holland, Mich., has been among the companies continually finding new efficiencies, even during recession. At one small production "cell" at a factory in Michigan, employees recently suggested consolidating into less floor space the machinery and materials used to make finished parts. One result: Workers now don't have to walk as far. Along with other time-savers, Donnelly was able to cut the number of workers in the cell to three from five while keeping the output per hour steady.
Such efforts are repeated elsewhere in the business. Donnelly this year is aiming for a companywide 5% rise in parts produced per employee per hour. Such improvements, says corporate controller Charles Pear, are critical to maintaining operating margins at a time when customers are demanding lower prices.
In a separate economic report on Tuesday, the Fed said U.S. consumers continued to borrow at a modest pace in March. Consumer credit outstanding rose $4.6 billion to $1.69 trillion, for a 3.3% annual growth rate, following a revised $7 billion rise in February.
The March increase in borrowing was led by a $3.1 billion jump in nonrevolving credit, which includes loans for cars and vacations. Revolving credit, such as credit cards, rose $1.5 billion |
