The Unnoticed Statistic

Posted by: Michael Mandel on August 29

The single best statistic for judging the health of an economy is what’s known as multifactor productivity (MFP). (I wrote about it here). MFP measures how efficiently an economy uses all of its physical, human, and technological assets.

To put it another way, rising MFP is like free money—you get added output without having to invest more. An economy with fast-growing MFP will over the long-run always beat one with low-growth MFP.

I didn’t see it at the time, but in June the Bureau of Labor Statistics issued early estimates of MFP for 2003 and 2004—and the results were spectacular. According to their numbers, MFP growth was 3.1% in 2003 and 3.3% in 2004.

To put these results in perspective, this was the first time MFP growth had topped 3% since 1976. And it was the first time since the mid-sixties that the U.S. had had two straight years of plus 3% MFP growth.

If MFP keeps rising at this rate—if Americans keep finding ways to work smarter and to advantage of new technology—then the trade and budget deficits are fairly irrelevant.

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Reader Comments

KG

August 29, 2005 07:15 PM

Michael,

If 2002 was 2% and both 2003 and 2004 are over 3%, then this is much higher than it was in the late 1990s. Does this mean we are on the cusp of a new boom, even bigger than that, or is MFP just catching up with the stock market and GDP, which remained at a higher trajectory permanently even after the 2001 recession?

Also, how does MFP tie to GDP? I know that Labor productivity has a loose corelation to GDP per capita, and thus adding 1% for population growth, a long-term labor productivity rate of 2.5% might translate to a 3.5% GDP growth rate (excluding current accounts).

But how does MFP corelate to GDP, if at all?

MM

August 30, 2005 09:08 AM

Hi KG

To answer your second question first, you are right..MFP is very closely connected with GDP. Roughly speaking private business output is equal to the product of multifactor productivity, labor inputs, and capital services. Labor is adjusted for education and experience, and capital is adjusted for depreciation and investment.

That makes MFP probably the most important component of whether we are in good times or bad. times.

steve baker

August 30, 2005 11:10 AM

I'm surprised by such a high number in 1976, smack in the middle of the worst economic decade since the 30s. Did it help boost the economy briefly in the late '70s before the second oil crunch arrived?

KG

August 30, 2005 12:03 PM

MM,

OK. But then, given that 2002, 2003, and 2004 have been just about the best MFP growth period in the last 36-38 years, and much better than the late 1990s, does that mean that we are in the midst of the biggest boom since then?

When we exclude current account deficit, our GDP is indeed growing at 5% per year. But where else do we see the supercharged MFP manifest itself?

MM

August 31, 2005 08:56 AM

Steve, there were actually a bunch of okay years in the late 1970s, in terms of growth. The growth rate in 1976, 1977, and 1978 were 5.3, 4.6, and 5.6, respectively.

KG--I think the high MFP is showing up in strong corporate profits and rising asset values.

KG

August 31, 2005 05:20 PM

Michael,

So, corporate profits are rising. But housing is widely seen to be a bubble in coastal cities, driven by low interest rates and funny loan products.

GDP is moderate but not great. ISM indices are good but not great. Consumer confidence is moderate but not great. Only MFP is turning in the best numbers in 35+ years.

My question still remains : Given that 2002, 2003, and 2004 have been just about the best MFP growth period in the last 36-38 years, and much better than the late 1990s, does that mean that we are in the midst of the biggest boom since then?

Joe

September 29, 2005 11:02 PM

With All this talk about rising MFP, Rising profits, and growth of assets, why is the stock market so flat this year? Actually the DJIA is down about 2% this year.

Ann

January 4, 2006 01:00 AM

I'm surprised by such a high number in 1976, smack in the middle of the worst economic decade since the 30s. Did it help boost the economy briefly in the late '70s before the second oil crunch arrived?

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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