Productivity Takes Steep Jump; Labor Costs Kept in Check
Economic productivity jumped sharply this summer even as labor costs remained in check, a combination that dampened speculation that the Federal Reserve will raise interest rates next week.
Productivity--the amount of goods or services that a worker can produce in a given period--jumped at an annual rate of 4.2% in the three months ending in September, the Labor Department reported. That was the biggest quarterly gain since the beginning of 1998 and one of the biggest of the booming 1990s. It also surpassed private forecasters’ estimates, which had ranged from 3% to 3.5%.
More significant, productivity rose by 2.9% from the third quarter of 1998. Though the year-to-year comparison yields a smaller number than the quarterly rate, economists consider it the more revealing statistic, because it washes out many seasonal and other distortions.
And even a 2.9% productivity growth rate, if sustained, would be more than robust enough to signify that the U.S. has finally pulled out of the long productivity slump it sank into in the 1970s.
U.S. productivity has always been hard to measure, because it’s difficult to lump together the outputs of all workers, from garment stitchers to theoretical physicists. And it has grown tougher in recent years, as “unquantifiables” such as services and intellectual properties have come to represent a much larger share of U.S. economic activity.
For economic observers, it has been perplexing that productivity didn’t appear to grow much in the 1980s and 1990s, even though U.S. businesses poured millions into efficiency-enhancing new technology.
But Friday’s Labor report marked the first time that U.S. productivity has been measured using new methods that attempt to take technological advances into account. The Labor Department revised the figures all the way back to 1959, and came up with numbers that suggest the U.S. has been more productive than previously believed, at least since 1973.
“The message here is very favorable for the U.S. economy,” said Richard Berner, chief U.S. economist for Morgan Stanley Dean Witter. “This technology boom is for real.”
The Labor Department also said Friday that labor costs rose by just 0.6% during the third quarter, and by a relatively tame 1.7% from the third quarter of 1998.
Analysts who have been trying to guess whether the Fed’s Open Market Committee will raise interest rates when it meets Tuesday said the labor-cost and productivity news are a sign that the Fed might leave rates alone. Federal Reserve Chairman Alan Greenspan has said the committee would raise interest rates if there were signs of inflation--but higher productivity is believed to permit growth without inflation, as do low labor costs.
“The reverse of what Greenspan was worrying about has actually happened,” said Peter Kretzmer, a senior economist with Banc of America Securities.
In another indication that the Fed may not raise rates next week, the Commerce Department reported that retail sales remained unchanged in October, after slipping 0.1% in September.
Kretzmer said he was basing his views largely on a speech Greenspan delivered in late October, in which the Fed chairman mused at length about new technology and the many ways it may be raising productivity.
Greenspan said that in the future, the Fed would carefully monitor the relationship between productivity growth, the labor markets and consumer demand as it developed monetary policy.
In the past, monetary policy appeared to be a more straightforward matter of weighing the relationship between labor markets and inflation: When unemployment has dropped to a certain level, inflation has generally tended to accelerate, and the Fed has moved to cool things down by tightening the money supply.
Kretzmer said Greenspan’s recent words suggested that he thinks the old relationships may no longer apply so strictly--that thanks to technology, lower unemployment and higher economic growth may be possible without inflation.
“Greenspan has been increasingly optimistic that . . . we may have entered a new period of higher productivity growth,” Kretzmer said. “Really, productivity isn’t the kind of statistic you hang onto in the morning. But because the chairman has been talking about it, and talking about it in the context of what short-term monetary policy should be, it is important.”
Overall, the growth rate appears to be accelerating as U.S. economic activity has become more automated.
From 1973 to 1979, the productivity growth rate averaged 1.3% under the Labor Department’s new measuring system, compared with just 1.1% under the old one. From 1979 to 1990, productivity now averages 1.4% annual growth, compared with 1% under the old statistical methods.
And from 1990 to 1998, productivity averaged 1.9% annual growth, compared with the 1.3% it was showing before.
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Steady Sales
Total retail sales, seasonally adjusted, in billions of dollars:
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October: $252.5 billion
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Source: Commerce Department
