A Productive Quarter
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No economic statistic is more important to the New Economy and to technology investors than nonfarm productivity.
Which makes this morning's better-than-expected gain in second-quarter productivity pretty good news, particularly following the first quarter's unexpected decline.
Second-quarter productivity grew 2.5%, almost a full percentage point above estimates. Index futures turned from negative to flat-to-up on the news.
However, the report wasn't all good news, as could be expected given the sharp slowdown in the economy. The gain in productivity was largely due to a 2.4% drop in hours worked, the sharpest decline in a decade. Output rose at its lowest rate since 1993, a 0.1% increase. Unit labor costs rose a much-less-than-expected 2.1%, keeping inflation pressures in check.
As Princeton economist Alan Krueger wrote in the New York Times recently, "Productivity growth is ground zero in the debate over the new economy." It will continue to be so after today.
Productivity is a measure of worker output per hour worked. When output is high, labor costs can be better absorbed, inflation can be kept in check, and corporate margins are more robust. When productivity has grown in the 3%-4% range, recessions have been virtually unheard of. After running in the 2%-4% range for the second half of the 1990s, productivity growth has now slipped to 1.6% year-over-year, slightly above the historical average. But that's still well above the declines that marked brutal recessions in the 1970s and early 1980s.
The consensus view, led by none other than Fed Chairman Alan Greenspan, is that the IT investment surge of the late 1990s created sustainable gains in productivity that allow the economy to grow at a faster rate than it historically could without triggering inflation. This morning's report will no doubt be seen by some as supporting that view.
But others view the productivity surge as a temporary phenomena based on a massive investment in information technology. They will see the year-over-year figure, more in line with historic norms, as supporting their view.
Ironically, technology investment is one of the central arguments of those who believe the productivity gains of the late 1990s were temporary. The reason? All the new remote computing and connectivity capabilities have made it possible for people to work longer hours that are not recorded by the U.S. Bureau of Labor Statistics, a claim BLS statisticians dispute.
The truth probably occupies the middle ground between the two camps. The IT investment boom was fueled in part because business software and the new connectivity technologies have resulted in more efficient business processes. But as IT spending has declined, so has productivity. It will likely take a few more quarters of data to get the real story.
But when the economy eventually rebounds, so too will IT spending. A survey last month by the National Association for Business Economics found that most companies are still under-invested in information technology. Once excess capacity is absorbed from areas like the telecommunications sector, the next IT growth phase could be led by businesses.