Productivity Growth Continues Red Hot
By Dr. Peter Morici, Professor of International Business

Today, the Department of Labor reported productivity advanced in the nonfarm private business sector at a 4.7 percent annual rate in the third quarter. Over the last year, this indicator of productivity has increased 3.1 percent.

Nonfarm private business productivity is a key indicator of the growth potential of the U.S. economy. Since 1999, nonfarm business productivity has advanced at a 3.3 annual rate, up from the 1.9 percent rate accomplished during the previous decade.

This pace of productivity growth indicates that the U.S. economy has the potential to accomplish 4 percent growth or better without danger of significant inflation. In a nutshell, the potential adult labor force grows about 1 percent each year, and adding a 3.3 percent trend rate of growth in productivity indicates 4.3 percent annual growth is sustainable.

This strong productivity performance should give the Fed confidence that inflation poses little threat and interest rates need not be pushed much higher to keep the economy from overheating.

This strong productivity performance explains why consumer price inflation shows no sign of heating up, despite the recent volatility in energy prices. On a year over year basis, productivity of nonfinancial corporations increased 4.7 percent in third quarter productivity, and this excellent productivity performance explains how businesses have absorbed higher energy and modest wage increases while keeping prices charged consumers in check.

High productivity growth has enabled corporations to enjoy strong profits growth, absorb somewhat higher energy and material prices, and raise wages without pushing up prices more than about 2 percent a year.

The productivity performance of U.S. factories remained particularly encouraging. In the third quarter, manufacturing productivity advanced at a 3.4 annual rate, and for durable goods, productivity increased at a 6.5 percent annual rate.

The continued strong performance in manufacturing goods raises serious questions about the growing trade deficit, and difficulties U.S. companies encounter competing with imports and winning export markets. Since 1999, manufacturing and durable goods manufacturing have enjoyed 5.2 and 6.0 percent annual increases in productivity, indicating their competitive performance in global markets is held back by an overvalued dollar, federal budget deficits, higher prices for health care and energy in the United States, and other regulatory burdens imposed by Washington.

It would appear that neither the Clinton nor Bush administrations have been able to deliver on promises to improve the performance of U.S. industry in global markets. These productivity figures indicate the U.S. trade deficit and competitiveness problems are manufactured in Washington and not by Americas businesses and workers.