Bob Gordon Has Bad News About Productivity

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:

trends_totalvsNFPB_RKrev_080206_11993_image001.gif

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.

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Reader Comments

tim

February 6, 2008 06:14 PM

The culprit is that tech investment is still too light, as Erik Brynjolfsson has been saying.

David Ticoll

February 6, 2008 06:48 PM

Michael, can you clarify the difference between productivity growth and trend productivity growth, and why this matters?

Also, when you say the New Economy productivity surge may have disappeared - do you mean that the productivity gains have been eliminated or that the New Ecobnomy rate of productivity growth is no longer in the cards for the future? (I assume you mean the latter)

Mike Mandel

February 6, 2008 08:09 PM

David,

The reported productivity numbers bounce around from quarter to quarter. They also vary with the stage of the business cycle. However, at any moment there is an underlying trend which represents the "true" rate of productivity growth (also sometimes called the sustainable rate of growth).

In some ways "trend productivity growth" is a platonic ideal. You can never really observe it directly, only its shadow on the wall. What Bob Gordon has done is apply some statistical techniques to figure out what the trend is at any time.

Now, the assumption--which is sometimes right and sometimes wrong--is that the trend will continue over time. But the fact that it is slowing cannot be good news.

godfree Roberts

February 6, 2008 09:17 PM

To deepen the gloom check out the work on SUSTAINABLE productivity (what's left after subtracting the effects of foreign borrowing and replacement of existing technology) by CEPR at http://www.cepr.net/documents/publications/productivity_2007_06.pdf

Kartik

February 6, 2008 09:53 PM

I haven't felt this bad about the future since the morning of 9/11/01.

Now, as developing countries still have very little Internet penetration, their productivity surge is yet to come, correct? Internet penetration still has a long way to go before saturation, at a WW level.

Thus, one could still earn a decent return in Emerging Market equities, one would think.

kio

February 7, 2008 05:10 AM

I have compiled a simple figure illustrating relation between productivity growth and labor force participation rate in the USA since 1960.
http://inequalityusa.blogspot.com/2008/02/effect-of-labor-force-growth-on.html

For the sake of better representation, the measured growth rate of labor force participation rate, dLFPRm/LFPRm, has been converted according to the following relationship:
dLFPRc/LFPRc= -2.0dLFPRm/LFPRm + 0.022

Effectively, dLFPRc/LFPRc, is a scaled inverted and shifted dLFPRm/LFPRm.


It is clear from this figure that a 1% increase in dLFPR/LFPR results in a 2% reduction in the rate of productivity growth. Since 2003, the LFPR has been increasing. Therefore, productivity has been growing at a lower rate with corresponding lower long-term trend.

Ned

February 7, 2008 11:12 AM

Real (non-cyclical) productivity growth comes from a change in the "technology" of production that permits a significant change in the combination of labor and capital. Think of Gutenberg and his printing press replacing all those monks laboriously producing Bibles by hand. Productivity growth based on the printing press has long since faded to nothing. The PC and networking were a similarly significant development, but as their penetration has increased, additional productivity gains from further penetration becomes smaller. This will continue until the arrival of the next big, big thing. This should not be a surprise.

supafly

February 7, 2008 12:07 PM

This is exactly the kind of boring data that kudlow cannot be bothered to disseminate. Thanks Michael.

Goodfree, for their first adjustment(pg4), I don't buy their connection between higher living standards and productivity. In China for example, productivity has obviously grown tremendously, but for the majority, living standards have not (at least not proportionately). Isn't that a good sign, as in higher savings and investment? It is easier and simpler to consider S=I=GDP-C-T-M+X

kio

February 7, 2008 03:14 PM

It is even better than I could imagine. A small extra (30 minutes) dig into the relationship between labor force participation rate, LFPR, and productivity,P, as expressed by $ per hour, showed an outstanding result.
dP(t)/P(t)= (-3.0dLFPR(t)/LFPR(t)+0.035)*(LFPR0/LFPR(t))**4.7
where LFPR0 is the labor force participation rate in 1960.

This is, obviously, the result of diminishing relative input into real GDP of any additional labor force unit (person) with diminishing capabilities. Effectively, if the distribution of the capabilities of real GDP production (e.g. income) decreases exponentially, as observations of personal income show, one can expect that any extra person induces a decrease in productivity because his/her input is lower than mean input. The smaller is her/his input (income), the larger is the decrease in productivily. From this, any increase in the LFPR induces a decrease in productiovity in some power - 4.7 for the USA between 1960 and 2006, as data show.

I am putting corresponding figures and equation nin my new post in
http://inequalityusa.blogspot.com/
So,

david foster

February 7, 2008 09:32 PM

"In the late 1990s the primary cause of the productivity growth revival was the dot.com boom and invention of the WWW"...this seeems highly questionable. Most of the Internet applications with real productivity impact did not make their appearance, or gain serious mass, until the early-to-mid 2000s. And a substantial part of the dot-com boom involved the destruction of wealth--yes, it was "creative destruction," paving the way for later gains, but why would the creation of a low-revenue negative-profit company show up as a contributor to productivity improvement?

photoncourier.blogspot.com

Ajay

February 14, 2008 03:13 AM

David, Bob is not a technology guy and he, like most people, confuses the hype of the dot.com/www boom with the efficiencies brought by IT in general. Unless you're arguing that the wide deployment of computers and the internet in the 90's did not increase corporate productivity? As for the fundamental argument that all the productivity gains from IT have been harvested, anybody who actually works with the technology knows that this is nonsense. I can't speak to all the problems with aggregate statistics like trend productivity growth or exactly why it appears to be declining but I'm fairly certain the accelerating pace of growth spurred by technology change will only continue. Of course, technological change comes in spurts and is lumpy so productivity growth may reflect that.

david foster

February 14, 2008 10:33 AM

Ajay...What specific Internet applications (as distinguished from applications running on corporate WANs or proprietary VANs) were widely enough deployed by the late 1990s to have a material influence on economy-wide productivity?

Ajay

February 15, 2008 01:27 PM

Hello David, Glad to see you're following up on this, I must say I'd never heard of VANs before. I will note that I attributed the productivity growth to IT, which includes the dual technologies of the PC and the internet, not just the internet alone. With the wide deployment of PCs with GUIs in the 90s, PCs became easy enough to use that productivity took off. Also, they became powerful enough, because of Moore's law, that they could handle a lot of office activity. As for internet-based technologies, email was widely deployed in the 90s and while it may seem like a trivial technology, one has to be careful not to underestimate the huge gains even simple communications technologies can bring, by allowing people to come in contact with each other much more easily and throwing out tons of benefits and efficiencies from the assortive sorting that results. I must say I'm a bit confused about your stance. Are you saying there was some other reason for productivity growth than IT or that the growth is a mirage?

david foster

February 17, 2008 08:49 AM

Ajay...a couple of things:

1)There are all kinds of things that impact productivity other than IT. To take a current example, the shift of freight from truck to rail surely increases labor productivity significantly. Expanded use of containerized freight did the same, as did the adoption of improved production methods (such as those inspired by the Toyota Production System) in manufacturing. Computers & communications do not comprise the entire economy, and are not the only sources of productivity improvements.

2)VANs are value-added network services, such as that operated for many years by GE Information Services (now spun off as GXS) These networks have been widely used for business-to-business electronic commerce, beginning in about the mid-1980s, and achieved significant penetration in industries including automotive/heavy equipment, retail, chemicals, and office supplies.

Ajay

February 19, 2008 06:51 PM

Nobody's saying IT was the ONLY source of productivity growth, only that it almost surely was the most significant factor, considering it was the new ingredient introducing en masse in the 90s. I would suspect a far larger factor than improved shipping and production methods was the widespread use of computers to cheaply do capacity planning much more efficiently. As for VANs, I guess the fact that the productivity boom didn't hit till the 90s just goes to show that B2B ecommerce wasn't as big a deal as the basic office PC for overall productivity. You keep quibbling about minor points, and aren't even saying anything worthwhile about those, is there a larger argument you'd like to make? Because if there isn't some larger beef that you have, I don't know why you persist in offering these mistaken quibbles.

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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