Economics, Pethokoukis

Worrisome: Productivity growth is still stuck in first gear


Mike Feroli of JP Morgan:

Productivity in the nonfarm business sector advanced at only a 0.7% annual rate in Q1, and over the past year has increased a mere 0.9%. The longer-run trend in productivity appears exceptionally weak: over the past three years productivity growth has averaged only 0.7%.

Readings that low are rarely seen outside of recessions, and there is little reason to expect productivity growth to pick up anytime soon. Business investment in high-tech capital — a prime driver of productivity growth in recent decades — has remained quite weak in the current cycle.

See the below chart on the investment data. Anyway, we are actually approaching a 10-year productivity slowdown by official numbers. Of course, those stats may be understating productivity since output figures don’t count some $300 billion a year in missing free-stuff production not counted in GDP. Still, boosting business investment would seem to be a good thing. One option is the immediate expensing of business investments. Aparna Mathur:

Expensing benefits businesses by increasing the present value of the deductions that are allowed for investment costs. Whereas under depreciation provisions, investment costs must be deducted over time, under expensing investment costs are deducted immediately. With full expensing, the value of the deduction will exactly offset the present value return on the investment over its lifetime, so the effective marginal tax rate on investment will be zero. This will cause more investment to be undertaken, an expanded capital accumulation in the economy, and in the long run greater growth.


3 thoughts on “Worrisome: Productivity growth is still stuck in first gear

  1. I agree we have a productivity problem, but this analysis is far from complete. Usining a PV analysis to explain marginal rates hardlly explains what went on this past decade. I do not remember what the figures were when early in the Bush Admin we re-patriotated overseas dollars back into the U.S. — it was a large amount and some of that got reinvested back in the U.S.; but, much of it went back overseas as the multi-nationals continued to get more earnings from oversea operations. In addition, the trade/balance-of-payment imbalance has shuffled a great amount of investment in the U.S. (several hundred billion a year) and not all of that in treasuries.

  2. Since some misguidedly complain about consumer spending, one useful thing to look at is the ratio of investment spending to consumer spending. This graph from the Fed graph site shows that:

    It hasn’t recovered to where it was before the recession. It built up to a higher rate the last couple of decades, likely because more capital is needed per worker to maintain and grow a competitive modern workforce.

    If you examine the figures closely however, over time productivity growth per year has been going down gradually for several decades, which is natural if it wasn’t exponential growth to begin with but was a lesser growth curve. It may have come close to an exponential fit, but fit slower growth curves even better.

    The economy is composed of many different industries with different growth curves, some S-curves due to the need for innovations to spread, some where a productivity improvement was an S curve rather than exponential, some where it was merely linear, or some sporadic growth. There is not any real reason to expect it to continue growing at the same rate since this isn’t some natural law even if overall things have averaged out to be fairly steady growth (even if it has slowed a bit). The impact of future innovations isn’t predictable since we don’t know what they are, it is safest to assume the worst or planning purposes, that growth continues slowing. It is best however to try to encourage innovation by leaving money in the private sector since some new discovery may kickstart rapid growth.

    • In general I agree with you. BUT, we have had times when the Fed Govt stepped in a propelled growth — the 1960′s: military spending, the race to the Moon, and the incentives for private investment. During the ’60′s the Debt/realGDP went from around 70% to less than 40% with one Fed deficit after another — the reason: real economic growth. We could do the same together if the private sector stepped forward — last Nov 2012 the Dallas Fed/R. Fisher said there was $2Trillion in corporate America available for investment and $1.4Trillion in the Fed.

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