US Daily Economic Notes:Productivity is the key to higher GD
Commentary for Tuesday: At the time of this publication, we had not yet receivedthe results of yesterday's FOMC meeting. One topic that monetary policymakerslikely touched upon in their meeting yesterday was the recent performanceof productivity growth, which was revised meaningfully higher last quarter.
Generally speaking, for the economy to expand at a 2%-plus rate this year andnext, which is our forecast, the recent improvement in productivity growth willneed to be sustained.
Productivity has increased 1.2% over the last four quarters, which is twiceits trailing five-year annualized growth rate. As shown in the chart below,productivity growth has been abysmal. According to our calculations, the recenttrend in productivity is the second worst on record, eclipsed only by the five yearsending in 1982, which contained data points from the stagflation period of thelate 1970s. In the long run, real GDP growth can be thought of as the sum ofproductivity growth and labor force growth. With the latter slowing as the labormarket approaches full employment, the former will need to improve further forinflation-adjusted output to upshift from its lackluster 2.1% trend growth rate inthe current business cycle.
The primary driver of productivity growth is capital spending net ofdepreciation, which is essentially the growth rate of the economy’s capitalstock. The mild firming in the growth rate of the economy’s capital stock,which began in 2013 and improved further in 2015—the data are released bythe Bureau of Economic Analysis with a multi-year lag—is showing up in fasterproductivity growth today. This trend should continue based on the improvementin nonresidential fixed investment, which is the primary input for estimating thegrowth rate of the capital stock.