Sanjay Paul

Green Bay Press-Gazette
Dec. 6, 2002

“The productivity numbers are in! BLS has come out with the numbers!”

Anand was prone to excitement in such matters, but his exuberance in this case, Sylvia felt, was fully justified.

Labor productivity, defined by the Bureau of Labor Statistics as output per hour of all workers, is the key to the citizenry’s living standards. Growth in labor productivity enables firms to raise wages without commensurately increasing the prices of their goods, thereby increasing the real purchasing power of workers.

But how much had productivity risen in the third quarter, Sylvia wondered.

“5.1 percent,” Anand said, almost giddy with delight. “Productivity rose over 5 percent!”

A big increase

That was big news, Sylvia noted. During the 1970s and 1980s, productivity had risen slowly — the average annual gain during the 1970-89 period was 1.7 percent. In the 1990s, however, the pace had quickened. For the decade, productivity grew 1.9 percent each year on average, with the strongest gains coming in the second half of the period(2.5 percent).

The robust productivity growth of recent years had, in fact, led the Federal Reserve Chairman Alan Greenspan to conclude (correctly, as it turned out) that inflation would remain quiescent, thus setting the stage for deep interest-rate cuts. The federal funds rate (the rate at which banks lend to each other) fell from 6.2 percent in 2000 to 3.9 percent in 2001. In 2002, the Fed has cut rates repeatedly in an attempt to revive a moribund economy, and the federal funds rate now stands at 1.25 percent, a historic low.

Such dramatic reductions, Sylvia noted, would have been inconceivable in the absence of strong productivity growth. But Greenspan might have felt a tremor last year, when productivity rose a scant 1.1 percent. More recent data, however, should serve to reassure him, Sylvia noted — in 2002, productivity has grown 8.6 percent, 1.7 percent and 5.1 percent in quarters one, two and three, respectively.

Interest rates will stabilize

With such gleaming numbers facing him, Greenspan is unlikely to raise interest rates soon. Consumers may be pleased with the continued prospect of zero percent financing for cars and appliances. Homeowners, likewise, will welcome the likelihood of mortgage rates remaining low.

But investors, especially those who are retired, will be less sanguine — the prospect of continuing to earn imperceptible yields on their money market funds and CDs, Sylvia noted, can scarcely be a pleasant one. The stock market, despite having regained in recent months a scintilla of its former allure, still remains forbidding to most investors.

With inflation in check, however, bonds remain attractive, and real estate, despite displaying bubble-like symptoms of its own in recent months, may offer yet another sanctuary for the troubled investor.

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Sanjay Paul is associate professor of economics at Elizabethtown College. He lives in Hershey, Pa. E-mail him at columns@greenbaypressgazette.com.