Slower Growth in Productivity Renews Worries
Worker productivity, one of the main tent poles of the “new economy,” grew at a slower pace than expected in the first three months of this year, the government reported Thursday, raising new fears of inflation.
Several economists said the apparent productivity slowdown may have been just a “payback” for explosive gains at the end of 1999 caused by Y2K-related buildups of business inventories.
Financial markets largely shrugged off the news, remaining fixated instead on today’s employment report and Tuesday’s meeting of the Federal Reserve’s interest-rate-setting committee.
Fed Chairman Alan Greenspan, in a speech Thursday in Chicago, gave no indication of how the central bank was leaning on interest rates. He confined his remarks to the risks that complex new financial products pose to the stability of the banking system.
Nonfarm productivity--or output per hour of labor--rose at an annual rate of 2.4% in the three months ended March 31, the Labor Department reported. Many economists had forecast a growth rate of 3% or more, on top of the stunning 6.9% annual rate logged in the fourth quarter of last year.
Productivity matters because it enables businesses to raise workers’ pay without charging higher prices. If wages rise by 4% and productivity rises by 3%, then unit-labor costs--a component of inflation--rise by the difference, 1%.
The generally brisk productivity gains of recent years are Exhibit A in the argument that advances in communications and computer technology have ushered in a new era of fast economic growth and rising incomes without the malign side effect of high inflation.
But what if big productivity gains aren’t a permanent feature of this new economic structure? What if instead they only reflect poorly understood cyclical patterns?
James Grant, founder of the newsletter Grant’s Interest Rate Observer and a prominent dissenter from the “new era” theory, said that while quarterly productivity figures are notoriously volatile, Thursday’s report should at least raise doubts about whether Silicon Valley has created a magic bullet against inflation.
“Technology was not invented with the Internet,” Grant said. He noted that productivity grew an average of more than 3% a year from 1960 through 1966, a far stronger and more consistent performance than that of recent years.
Economists James Medoff and Andrew Harless, in a study commissioned by Grant, say that the government both overestimated economic output and underestimated hours worked during the frenzied effort to combat the Y2K computer problem. The result, they contend, was a severe overstatement of productivity gains for the third and fourth quarters of 1999.
Other analysts agreed Thursday that Y2K-related activity may have distorted the picture last year, but said that doesn’t mean the technology revolution isn’t having a real effect.
Economist Brian Wesbury of Griffin, Kubik, Stephens & Thompson in Chicago noted that productivity rose 3.7% between the first quarter of 1999 and the first quarter of this year--the largest year-over-year gain since the fourth quarter of 1992.
As an example of how technology drives productivity, Wesbury cited the Internet-only release of Stephen King’s novella, “Riding the Bullet,” which sold an astonishing 500,000 copies in three days in March.
For the same output as a print bestseller, “it took probably only 1% of the normal personnel resources--sales clerks, printers, truck drivers,” Wesbury said.
Economist Ian Shepherdson of High Frequency Economics in Valhalla, N.Y., said the late-1999 productivity gains were inflated by a buildup of inventories by firms worried about Y2K-related shortages of materials.
The first-quarter downturn may be the other side of the same coin and thus artificially low, Shepherdson said.
However, Shepherdson, who is British, recalls the pain that resulted in 1980s England when strong productivity growth abruptly and mysteriously evaporated and rising wages propelled inflation sharply higher.
Shepherdson noted that the Federal Reserve Bank of Chicago, in releasing its “Beige Book” report on economic conditions Wednesday, found intensifying wage pressures in all regions of the United States.
The Fed ought to react to those pressures by raising interest rates now, Shepherdson said, rather than hoping that productivity gains will continue to bail the economy out.
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Business Productivity
Percentage change from previous quarter at annual rate, seasonally adjusted:
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1st quarter: 2.4%
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Source: Labor Department
