Dean Baker at Beat the Press has a good post on a neglected topic: falling productivity growth. Recall that strong productivity growth in the 1990s is what enabled the US to have a high level of growth, reasonably loose monetary policy, and low inflation.
As we ventured recently, one of the culprits in the falling productivity story is the low level, by historical standards, of growth in investment in equipment and software (as well as in marketing and R&D). The ADP report on private non-farm employment showed that 108,000 jobs were added, with small and medium sized companies (up to 499 employees) adding jobs, and large companies shedding jobs. It’s the larger companies that generally make the bigger investments in productivity-enhancers like IT.
From Dean Baker:
The stronger than expected job growth reported for March is good news for the labor market, but it implies another quarter of weak productivity growth. Barring some large downward revisions, it looks like hours growth for the quarter will be a bit more than 1.0 percent. With the consensus estimate of GDP growth at 2.2 percent (seems high, given the weakness in investment and housing), we’re looking at another quarter with productivity growth in the 1.0 percent range. Productivity growth has averaged 1.6 percent since the third quarter of 2004.
The Wall Street Journal has been way out front on the evidence of a productivity slowdown, having run two major pieces in the last half year. Thus far, this topic has been largely ignored in the rest of the media. Productivity is the main long-run determinant of living standards. The productivity upturn in 1995 was rightly huge news. The evidence that it may be coming to an end is also huge news.