Smith Faculty Opinion Article February 2, 2006

U.S. Productivity Declines Offering
Ben Bernanke a Golden Opportunity
By Dr. Peter Morici, Professor of International Business


Today, the Department of Labor reported productivity declined in the non-farm private business sector at a 0.6 percent annual rate in the fourth quarter. Over the last year, this indicator of productivity has increased 2.7 percent.

It remains to be seen whether this poor quarterly performance is an anomaly, caused by the fourth quarter slow down in economic activity, or a break from the strong productivity performance the U.S. economy has demonstrated in recent years.

The absence of inflationary pressures, outside the volatile energy sector, provides an important indication that this fourth quarter dip is temporary. Only strong productivity growth would permit non-financial corporations and manufactures to continue posting large gains in profits given rising wages and energy and other material prices.

High productivity growth has enabled corporations to enjoy strong profits growth, absorb somewhat higher energy and material prices, and raise wages without pushing up core consumer prices at about 2.2 percent a year.

The productivity performance of U.S. factories remained particularly encouraging. In the fourth quarter, manufacturing productivity advanced at a 3.9 annual rate, and for durable goods, productivity increased at a 8.2 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 4.7 and 5.8 percent annual increases in productivity, indicating their competitive performance in global markets is held back by an overvalued dollar, federal budget deficits, skyrocketing health care costs, and impotent U.S. energy policies, and regulatory burdens imposed by Washington.

Sadly, President Bush's State of the Union Address offered little hope that the Administration will take significant steps to remedy these pressing problems. His proposals are reworks of previous initiatives and palliatives.

Rising productivity notwithstanding, outsized federal budget deficits, the overvalued dollar, uncontrolled health care costs and profligate energy policies make the Federal Reserves responsibility to maintain both growth and price stability more challenging.

Ben Bernanke, inheriting Alan Greenspan's pulpit, has a golden opportunity to asset leadership by speaking out on these vital issues, as he establishes his much anticipated inflation targets.

Non-farm private business productivity is a key indicator of the growth potential of the U.S. economy.

Peter Morici is an economist and professor at the Robert H. Smith School of Business, the University of Maryland, College Park, MD. E-mail: pmorici@rhsmith.umd.edu.