What the Productivity Numbers Can Tell You

And a possible Hostile React-O-Meter sighting.
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Yellow Fog

JACKSON HOLE, Wyo. -- And today we go through certain half-deserted streets.

The

chairman

mentions

productivity

more than anything else.

Should productivity fail to continue to accelerate and demand growth persist or strengthen, the economy could overheat.

That American productivity growth has picked up over the past five years or so has become increasingly evident. Nonfarm business productivity (on a methodologically consistent basis) grew at an average rate of a bit over 1 percent per year in the 1980s. In recent years, productivity growth has picked up to more than 2 percent, with the past year averaging about 2-1/2 percent.

Despite the remarkable progress witnessed to date, history counsels us to be quite modest about our ability to project the future path and pace of technology and its implications for productivity and economic growth.

But once output-per-hour (productivity) growth stabilizes, even if at a higher rate, any pickup in the growth of nominal compensation per hour will translate directly into a more-rapid rate of increase in unit labor costs, heightening the pressure on firms to raise the prices of the goods and services they sell. Thus, should the increments of gains in technology that have fostered productivity slow, any extant pressures in the labor market should ultimately show through to product prices.

These quotes make clear that future

Fed

policy now rests heavily on the path of productivity. Specifically, policymakers will not tighten if, like it already has (see second quote above), productivity growth can accelerate by another percentage point. Conversely, they will tighten if it cannot.

So the first question market participants ought to be asking is this: What does the Fed think productivity is going to do?

And sadly, the answer to that question is another question: Who the hell can tell?

Interpretations will doubtless vary, but your narrator gets out of the third quote above that the Fed has no earthly idea what productivity will do.

And even if you disagree, we are all in the same boat. We do know that the Feds seem set to pull the trigger if productivity growth doesn't continue to accelerate -- the final quote above and the "will have to act promptly and forcefully so as to preclude imbalances" line from the testimony say as much -- but we don't know if that's indeed what they think most likely.

So we all just have to wait and watch the

numbers as they are released.

Which leads to the second question market participants ought to be asking: Is productivity growth still accelerating? And does the information at hand suggest that it will continue to do so?

Again, interpretations here will vary, but two things suggest that the answer to both of those questions is No.

The first is the performance of the productivity numbers themselves. Nonfarm productivity was growing at a 2.6% year-on-year rate as of the end of the first quarter. That actually marks a slight deceleration on the 2.7% pace that prevailed during the quarter prior; it also represents only a marginal improvement on the 2.4% yearly pace that prevailed a year ago.

The second is the performance of real wage growth. It just plain sucked between 1993 and 1996 (when it grew only an average 0.1% per year) and then improved markedly alongside productivity growth during 1997 (up 2.2%) and 1998 (up 2.7%).

So far this year, however, it has decelerated markedly (up only an average 1.3% through June), and one wonders why that is happening if productivity growth is still accelerating at the same quick pace we've seen over the last few years.

Anyway.

As to other nuggets of interest, there were two.

By late last month, when it became apparent that much of the financial strain of last fall had eased, that foreign economies were firming, and that demand in the United States was growing at an unsustainable pace, the FOMC raised its intended federal funds rate.

Improving global prospects mean that the U.S. economy will no longer be experiencing declines in basic commodity and import prices that held down inflation in recent years.

And the message here is a simple one.

The more the rest of the world improves, the meaner the Fed stands to get.

Now hey. How about a round of drinks -- ones with little umbrellas -- for everyone?

Indeed. Little umbrellas all around.

Side Dish

No column Friday or Monday. Going to Los Angeles to sell a screenplay and get really rich so I can quit this stupid job.

Best city to visit this weekend?

Los Angeles.

Los Angeles.

Los Angeles.

Los Angeles.

Herb is no Padinha.