The Financial Times reports that in 2006 the US economy showed its lowest level of productivity growth in more than ten years, according to a study by the Conference Board.
This isn’t surprising. Falling productivity growth is an end-of-cycle phenomenon. And what has been unusual about this cycle has been business’ reluctance to invest and hire. A 2004 speech by Federal Reserve vice chairman Roger Ferguson pointed out that business investment actually declined for the first 18 months after the slowdown ended. Indeed, as an article in the Conference Board’s Magazine, Across the Board, indicated, for the last three years businesses have been net savers, an unprecedented development.
So it appears that the productivity growth has been largely driven by cost-cutting, rather than investment in new technology. Overzealous expense reduction is tantamout to dis-investing, starving future quarters to improve results now.
It is therefore rather odd that the Conference Board’s economist doesn’t see this drop as the product of the current, admittedly atypical business cycle. She argues that it as raising questions about the utility of information and communications technology. But if corporations haven’t been investing in tech (or much of anything else) how could they be reaping any benefits?
As the Financial Times reports:
The US economy last year recorded its lowest rate of labour productivity growth in more than a decade, with growth in output per hour worked falling behind the EU and Japan. The fall casts further doubt on the ability of the Federal Reserve to cut interest rates as the US economy slows.
Research to be published on Tuesday by the Conference Board, the international business organisation, shows that US labour productivity in the whole economy grew by 1.4 per cent in 2006 as slower economic growth was combined with a rapid rise in employment.
Gail Fosler, the chief economist of the Conference Board, told the Financial Times that the fall in productivity growth was unlikely to be cyclical and the result of weaker gains in services’ industries, raising “concerns about the long-lasting productivity impact of information and communications technology”.
If weak productivity growth continues, she said, “even in a slow growth environment, the US economy will be performing close to its potential”, restricting the Fed’s ability to cut interest rates.
Better economic figures released this year, alongside emerging signs of a slowdown in US economic potential, has led to tumbling market expectations of a rate cut in recent weeks. Investors now believe that there is only about a 10 per cent chance of a reduction in official interest rates by the May meeting of the Fed’s interest rate-setting committee, according to the Federal Reserve Bank of Cleveland