Posted by: Michael Mandel on February 06
Investors breathed a sigh of relief when they saw this morning’s productivity number—1.8% in the fourth quarter—was not as bad as expected.
But they may have exhaled too soon. The key number for the economy, for corporate profits, and for stocks is the underlying rate of productivity growth, also known as ‘trend productivity’—and the news there isn’t good.
Robert Gordon, the Northwestern University economist and productivity guru, just sent me his latest estimate of trend productivity growth— and according to his calculations, the trend productivity growth is now back to 1995 levels! In other words, all the New Economy productivity surge seems to have disappeared.
More precisely, his calculations (including this morning’s numbers—amazingly fast work, Bob!) show trend productivity running at a 1.78% annual pace. The last time it was this low was the fourth quarter of 1995.
Here’s the chart:
In his email to me, Bob wrote:
The continuing decline in the productivity growth trend provides further evidence that the productivity growth revival of 1995-2004 was a one-time event. In the late 1990s the primary cause of the productivity growth revival was the dot.com boom and invention of the WWW. During 2001-03 the further good news on productivity growth was due to a combination of the delayed impact of the 1990s technology surge (the “intangible capital” hypothesis) with unusually savage corporate cost cutting that caused the prolonged decline in payroll employment between 2001 and 2003.
Yowza. Lower trend productivity growth suggests that a period of sluggish economic and profit growth is on the horizon, and that inflation may turn out to be a bigger problem than expected.
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.