U.S. Productivity Growth in ’99 Is Best in 7 Years
In the clearest explanation yet for the nation’s low inflation amid red-hot growth, the government reported Tuesday a torrid 5% pace in fourth-quarter productivity growth. The year-end surge contributed to the best annual productivity performance in seven years.
Analysts said the full-year gain of 2.9% in productivity was a remarkable achievement this far into a boom that is already the longest in U.S. history.
Ordinarily, productivity, a measure of the work force’s efficiency, picks up most dramatically when the nation bounces back from a recession and starts returning unemployed workers and underused factories to full-tilt production. Then it slackens toward the end of the cycle. Higher productivity allows businesses to boost profits or wages without raising prices.
But the strong finish in last year’s second half--consecutive quarters with productivity growth at an annualized rate of 5%--suggested that the expansion still packs plenty of momentum.
The Labor Department figures released Tuesday, combined with a cluster of other recent government reports, show the U.S. economy chalking up an enviable array of accomplishments simultaneously.
Along with vigorous economic growth, the picture includes unemployment at a 30-year low of 4%, modest inflation and, according to Tuesday’s figures, nonagricultural businesses becoming ever-more efficient.
“This is the best of all worlds,” said Mickey D. Levy, chief economist for Bank of America.
On Wall Street, the technology companies whose products are believed to be driving the productivity surge saw their stocks rocket again on the news. The technology-dominated Nasdaq composite index soared 105.73 points, or 2.5%, to a record 4,427.50. The Dow Jones industrial average rose 51.81 points to 10,957.60.
Productivity growth, economists said, is the reason the expansion has continued for nearly nine years without rekindling inflation--the bugaboo that usually dogs, and ultimately undermines, economic growth.
So why is productivity surging? Economists surmise that it is the payoff from business’ huge investment in high technology--including more powerful computers and software, the Internet and other telecommunications advances and computer-guided production line improvements.
“It’s the new economy triumphant,” Merrill Lynch’s chief economist, Bruce Steinberg, said. “We’re cranking out more output without that much more labor input. It reflects the technological revolution that’s sweeping our economy.”
The government figures showed that manufacturing is reaping the greatest gains in productivity. For all of 1999, manufacturing productivity climbed 6.4%, the largest increase since a 6.9% rise in 1971. In the fourth quarter, growth hit an annual rate of 10.7%, the highest in nearly 18 years.
“Something extraordinary is going on there,” Steinberg said.
As recently as the mid-1990s, experts weren’t sure that heavy investment in high technology would pay off enough to justify the costs. After hitting 4.1% in 1992 as the nation emerged from recession, productivity growth fell to 0.1% the following year and was still only 1% in 1995. By 1998, however, the measure climbed to 2.8%.
Such strong productivity growth implies that the threat of inflation is greatly reduced. But few analysts expect the report to persuade the Federal Reserve to back away from its recent course of pushing up interest rates. The Fed, fearful of inflation regaining steam, has boosted short-term rates four times since last June and is expected to nudge rates up again when its policymakers meet next in March.
“The Fed will like this data very much, but it won’t stop it from tightening further,” Steinberg said. “The Fed is worried that we’re running out of warm bodies” to fill the job openings that continue to be created in the economy.
Levy agreed. “Productivity,” he said, “has continually outpaced nearly everybody’s earlier expectations. Grudgingly, the Federal Reserve has come to recognize that the sustainable pace of productivity gains is likely to be higher than they estimated 10 years ago, but, as cautious policymakers, they still question how long these strong productivity gains can last. The bottom line is, no one knows the answer to that question.”
Still, analysts such as Rajeev Dhawan, director of econometric forecasting at the UCLA Anderson Forecast, expressed support for the Fed’s focus on preempting inflation.
“I believe in the new economy, but I would not close my eyes and say we don’t have to worry about inflation anymore,” Dhawan said. “We’re definitely touching the limits of resources, at least from a manpower point of view.”
For working people, the productivity report was less bullish. Jobs are plentiful and stock market investments are thriving, but the latest figures demonstrated anew that pay and benefits still are not moving up much.
Hourly compensation--including wages and benefits--climbed at an annual rate of 4% in the fourth quarter, but that was the lowest level in two years.
After accounting for inflation, workers were left with a “real” hourly compensation increase of only 1.1%.
For the full year, real compensation per hour grew 2.6%, down from 3.8% the year before but better than the 1.4% in 1997.
Normally in an economic expansion, the growing demand for workers and other resources tends to bid up wages and prices, fanning inflation. But gains in productivity--the amount of output per hour of work--enable business to produce more without added work.
This is demonstrated in the government’s figures for labor costs per unit of production. In the fourth quarter, unit labor costs in the nonfarm economy fell 1%, after declining 0.3% in the third quarter.
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Business Productivity
Percentage change from previous quarter at annual rate, seasonally adjusted:
Fourth quarter
1999: 5.0%
Source: Labor Department
