August 08, 2003

I'm Not as Smart as I Thought I Was

Topic: I'm Not as Smart as I Thought I Was

Ah. I thought--from GDP and aggregate hours data--that we would have a 4% per year productivity growth quarter in the spring of 2003. I was wrong: we had a 5.7% per year productivity growth quarter. It is amazing that nonfarm business hours worked can fall--and fall at a 2.2% annual rate--in a quarter in which nonfarm business output can rise at a rate of 3.4% per year. If only we had demand rising fast enough to employ more rather than fewer people, the performance of the American economy would be truly amazing.


The Bureau of Labor Statistics of the U.S. Department of Labor reported preliminary productivity data--as measured by output per hour of all persons- -for the second quarter of 2003. The preliminary seasonally adjusted annual rates of productivity change in the second quarter were:

  • 6.1 percent in the business sector and
  • 5.7 percent in the nonfarm business sector.

In the business sector, productivity grew as output rose 3.2 percent and hours dropped 2.7 percent. A similar pattern occurred in nonfarm businesses, output grew 3.4 percent and hours fell 2.2 percent.

In manufacturing, the preliminary productivity changes in the second quarter were: 4.2 percent in manufacturing, 3.8 percent in durable goods manufacturing, and 4.4 percent in nondurable goods manufacturing. Manufacturing productivity grew 4.2 percent in the second quarter reflecting declines in output and hours of 2.1 and 6.1 percent, respectively.

Posted by DeLong at August 8, 2003 08:01 PM | TrackBack


Hours fall, jobs disappear, output rises -- all without any significant recent capital investment. It's pretty clear these 'great productivity numbers' are being achieved through work speed-up and exploitation more than anything else.

Not good news by a long shot.

Posted by: General Glut on August 8, 2003 08:13 PM

where is the final demand growth coming from?

Posted by: roublen vesseau on August 8, 2003 11:14 PM

"It's pretty clear these 'great productivity numbers' are being achieved through work speed-up and exploitation more than anything else."

Stephen Roach certainly agrees with you. This from his most recent musings at Morgan Stanley:

"The current experience of unrelenting headcount reductions in the face of persistently rapid productivity growth is a real outlier in the annals of the post-World War II US economy.

That may well reflect a dark side to America’s productivity bonanza, one that I have worried about for a long time (see my November 1996 article in the Harvard Business Review, “The Hollow Ring of the Productivity Revival”).  It all boils down to the essence of productivity enhancement -- whether efficiency gains are driven by synergies between human capital and technological innovation or by hard-nosed cost-cutting.  The former is “good productivity” -- the stuff of rising prosperity and lasting improvements in a nation’s standard of living.  The latter is “bad productivity” -- centered on strategies of downsizing that have the clear potential to lead to increasingly hollow enterprises and labor markets."

Posted by: Pooh on August 9, 2003 05:35 AM

There is in fact significant capital investment in high tech equipment and software, however the deline in prices of high tech products has led to the idea that such investment is lagging. Stephen Roach and Brad DeLong have pointed out that real high tech investment has been ample from 2001 on, simply not high enough and with enough price stability to produce the growth rates for high tech companies of the late 90's.

There is no reason to believe a surge in high tech investment in America is in the offing. Since it is hard to see how consumer demand for big ticket items can increase from the ample current demand, I do not see where the extra demand can come from to spur GDP growth.

The productivity doubters keep telling us the growth rate of productivity will slow, but that has not happened quarter after quarter. Employment is a problem and will continue to be a problem for some time. this lagging indicator is lagging to an extent we have not seen in 50 years.

Posted by: anne on August 9, 2003 08:06 AM

Preface: I am a long time Bear. And what I am about to say is not really good news.

I believe that much of the productivity come from the same source as everything else: debt. If people are borrowing and spending in a frenzy, then it is easy to make more money with fewer poeple. Just as there are people making a fortune in real estate right now, not because they are great sales people, but because there are buyers tripping over themselves to buy.

If you look at it, the productivity gain sources almost completely from wholesale and retail trade numbers - which is in line with the idea that the easier it is to sell, the fewer people needed to do it.

But what remains is continued productivity growth, and this isn't necessarily good for the economy. Producitvity exploded in the 1927-1932 period. The choice was made as business conditions worsened to use productivity enhancements to make the same things with fewer people. Back then it was mondern management, better transportation, better motors and rapid advances in chemistry that were the driving engines of technological productivity - and better marketting, training and organizational theory which were the driving engines of human productivity.

To give you an idea of how rapid the advance in productivity was in the period - follow the New York skyline - culminating with the Empire State Building. Each "tallest building" project cost less per floor, and had lower fatalities per floor, than the previous one. The same is true with the Golden Gate bridge - it cost less and had fewer fatalities than any similar bridge building project. The era truly was a marvel of productivity gains.

Not just in productivity, but general inventiveness. Television, radio, the atomic chain reaction, the electron microscope, the modern design of propeller airplanes, the turbo charged engine - the list of inventions from the 1930's is endless.

The problem was that the global system of trade and monetary balancing was incapable of allowing enough people to buy the products that the age was producing, and the capital system was in capable of productizing many advances that were present. The magnetic recording tape was invented, but it was a long time before it was a consumer device.

And that hits our problem - the frenzy of borrowing is hiding the fact that the basic economic problem of the last 30 years are in place:

1. An insufficiency of investment supply. There is plenty of investment demand.

2. Energy as the bottleneck commodity, rising consumer demand inevitably because rising energy demand at some point, choking off the economy.

1&2 combined create a relentless pressure to keep a lid on growth, "the stall speed economy" and therefore a relentless pressure to find lower wages - since slow growth means that lower wage centers can keep up with higher wage centers.

In fact, slower wage centers like living in a stall speed economy, where cities can't race too far ahead of them, they would rather borrow money through the government - than have larger productivity growth rates which don't help them as much as their metropolitan counterparts. Look at the map of Bush counties, and figure out who didn't like the 1990's economy.

To get out of this is going to require a readjustment of wealth parity between urban and rural areas, a creation of new investment supply, and the removal of the energy bottleneck.

Posted by: Stirling Newberry on August 9, 2003 08:33 AM


Please flush out your interesting set of ideas. The contemporary sense becomes confusing to me. Simply narrow the findsings and implications, for I am interested.

Posted by: arthur on August 9, 2003 09:18 AM

August 10, 2003

Business Spending Helps to Offset Lag in Refinancing

Even as mortgage refinancing fades, curtailing consumption, business spending on the tools of production is picking up, sustaining a tenuous upturn....

Posted by: anne on August 9, 2003 09:34 AM

August 9, 2003

Paul Krugman

How today's Treasury lies with numbers, part CCCLVI:

The following letter appeared in today's Times:

As the former Deputy Assistant Secretary responsible for tax analysis at the Treasury Department I must respond to Mr. Krugman’s recent column (August 5, 2003) accusing political bias.

The Treasury does detailed analysis of tax legislation and has reported many of these analyses on its web site. The Treasury Department also frequently responds to requests by the media for analysis.

Mr. Krugman objects to an analysis that showed the effects of the 2001 and 2003 tax cuts for six representative families. Among the six representative families, the analysis provided an example of a married couple, both spouses aged 65, with $40,000 in income, including $2,000 in
dividend income. Mr. Krugman objects that such a family is not representative of elderly taxpayers. Obviously, no single example can be
representative of all elderly taxpayers, but the example is useful precisely because it is unlikely to be misinterpreted - it applies to the
couple described. Further, this couple has income quite close to the median for such filers, their $2,000 in dividends is quite close to the
average amount of dividends for elderly filers at their income level, about half of which have dividend income. As a result, the elderly couple Mr. Krugman objects to is quite representative of such income tax filers. The example couple has seen a decline in its income tax liability from $1,396 to $675 as a result of the 2001 and 2003 tax cuts.

Mr. Krugman is certainly free to oppose the tax relief provided to the taxpayers described in these examples but he should be more circumspect in asserting political bias in the underlying analyses.

Andrew B. Lyon
College Park, MD

Did you get that? I'm more accustomed to this sort of math than 99 percent of readers, and it took me about 6 reads. The average dividend of elderly families with the median income, half of whom receive dividends ... it sounds as if this refutes what I said . But you'll notice that he never takes on my assertion that only about 1/4 of elderly families receive any dividends, which comes from Tax Policy Center ; nor does he challenge my statement that only 1 in 8 elderly households receive as much as $2000 in dividends, which comes from CBPP .

I leave it as an exercise for readers to figure out how Lyon's discussion is consistent with a real world in which the Treasury's "low-income" elderly household has more dividend income than 7 out of 8 elderly households.

The point, however, is that the confusing discussion shows the Treasury strategy at work. 1. Never answer the question directly. 2. Offer an elaborate calculation that sounds as if it refutes the accusation that the tax cut mainly favors the wealthy, when in fact it does no such thing.

For afficianados: notice how they're still doing the average/median thing. It's clear from what he says that the median dividend for families with the median income is ...

Posted by: anne on August 9, 2003 10:14 AM

Paul Krugman

- For afficianados: notice how they're still doing the average/median thing. It's clear from what he says that the median dividend for families with the median income is ... "0." -


Yes, I left out the ZERO, but you should have guessed that was the answer. This is the new improved treasury. Yuch.

Posted by: anne on August 9, 2003 10:20 AM

Hmm, pick the average (mean) for income and the median for dividends...drawn from a distribution known to be skewed, then protest that your selection can't be representative because it's an n of one...but, still, after all, it is representative and therefore unlikely to be misinterpreted. I'm feeling suddently better about Jesuit logic.

Posted by: consigliere on August 9, 2003 10:36 AM


A brilliant comment.
I will quote you often.

Posted by: jd on August 9, 2003 10:50 AM


This is the new improved Administration!

Posted by: jd on August 9, 2003 11:02 AM

Anne wrote:

"Employment is a problem and will continue to be a problem for some time. this lagging indicator is lagging to an extent we have not seen in 50 years."

According to one regular poster, only the unemployment rate number is a lagging indicator. Payrolls and weekly claims are coincident and leading.

Is this true?

Posted by: Pooh on August 9, 2003 12:21 PM

Stephen Roach

"Since the economy bottomed in November 20, private nonfarm payrolls have contracted by 1.2 million workers. By contrast, in the first 20 months of the past six business cycle upturns, the private-sector job count increased, on average, by 2.8 million workers. That means the current hiring trajectory has fallen fully 4 million workers short of the cyclical norm -- taking the concept of “jobless recovery” that was first coined in the early 1990s to an entirely different level. This has resulted in an equally worrisome shortfall of wage income generation -- the main driver of personal income growth; over the first 19 months of the current cyclical recovery, real private-sector wage and salary disbursements have recorded a cumulative increase of just 0.3%, far short of the 6.8% average gains that have occurred by similar junctures in the past six business cycle upturns."

Posted by: anne on August 9, 2003 12:41 PM

Re: Business Spending Helps to Offset Lag in Refinancing By LOUIS UCHITELLE and JENNIFER BAYOT - NYImmes

Where is their hard evidence for suggesting that "as mortgage refinancing fades, curtailing consumption, business spending on the tools of production is picking up, sustaining a tenuous upturn"? They talk to X, Y and Z who tell them exactly what they want to hear, but such incredibly narrow and subjective evidence seems like a very thin reed on which to hang their proposition. In any event, why on earth would any manufacturer, except in exceptional circumstances, be investing in equipment given all the surplus capacity around, if not in the U.S. then in China or elsewhere?

Again, I have problems with Mark Zandi's belief that "A significant replacement cycle is kicking in." One has to wonder as to how can there be a replacement cycle (and I assume he's talking tech here) when firms have been replacing such equipment all along? Certainly that has been the observation of such tech investment mavens as Bill Fleckenstein and Fred Hickey.

Posted by: Pooh on August 9, 2003 12:53 PM

Stephen Roach's latest should give us pause when we look at the increases in measured productivity. How do we know that an X% rise in employment will mean an X% rise in output from such a noisy series? We have all sorts of attempts at measuring potential GDP but can we place a whole lot of confidence in them?

Posted by: Hal McClure on August 9, 2003 01:12 PM

Stephen Roach -

"A 54% annualized surge in computers and peripheral equipment accounted for virtually all the growth in business capital spending and actually another 65% of the total increase in real GDP growth in 2Q03. Yet it turns out that fully 83% of that gain is traceable to a collapse in IT pricing, according to Commerce Department assumptions. Indeed, in current dollars, last quarter’s growth in computers and peripheral equipment accounted for only 7.1% of the total gain in nominal GDP."

Posted by: anne on August 9, 2003 01:17 PM

Even if the productivity number are too high for the quarter, they have been high all through this slow growth period. We may well have 3% productivity growth for some time to come, so we may need 4% GDP growth for a sustained period to get sufficient job creation.

Posted by: jd on August 9, 2003 02:32 PM

Brad--admitting error on a blog? I'm afraid you haven't seen the memo on this. Bloggers are required to be unrepentant to the point of intellectual dishonesty!

Posted by: Paul on August 10, 2003 07:16 PM

Regarding the productivity numbers, it is stunning that the US private sector can achieve this, even if we were to determine that adjustments in hours or some other yet-to-be measured variables were responsible. It augurs well for earnings and for competitiveness.

I'm still amazed that people on this board argue that this is a bad thing, objectively speaking.

Advances in productivity did not single handidly cause the Great Depression, BTW.

Posted by: Jim Harris on August 11, 2003 05:32 AM

Obviously noone here thinks these are bad things, it's more a Goodhart's law kind of thing isn't it. Usually booming productivity and economic growth are good things but employment is falling. Is that a situation about to show a dramatic turnaround? Or do the staitistics not mean what we are used to thinking htey mean. For example hte numbers might look like this if manufacturing employment was being exported to the far east and senior management was putting the cost savings towards its productivity figures. A bit like downsizing -- spin off the underperforming parts of your company and show the figures for the remaining bits. No job is actually being done better in the short run but the numbers look better. If demand doesn't grow increased productivity means worse employment figures which isn't good for everyone.

Posted by: Jack on August 11, 2003 06:47 AM

"I'm still amazed that people on this board argue that this is a bad thing, objectively speaking."

Have you ever read Kurt Vonnegut Jr.'s "Player Piano?"

It's been a really long time since I've read it (at least 7 years) so I may have forgotten important parts. But as I recall, the situation is a future in which factories are almost completely automated, such that one single guy can run a major factory (like an automobile assembly plant).

That one guy makes boatloads of money, even though he doesn't really do anything, either. Just about everyone else is unemployed, and is given make-work jobs by the government, holding those signs on road crews. (For some reason, they still don't have machines for that, in this future. ;-))

So it's this major dystopia, from having such high productivity.

But as I recall, there's no thought in the book that such high productivity would mean that the goods produced in those factories would be incredibly inexpensive ($5000 Lexus, anyone?)

If I could have the same purchasing power I currently get from working 40 hours per week, while only working 20 hours per week, I'd definitely take the job!

I like player pianos! :-)

Posted by: Mark Bahner on August 11, 2003 09:20 AM

Jim, besides the direct negative impact on the unemployed, the increased productivity does put us in an "interesting position" regarding further economic shocks. In our current state, it is a sobering thought.

Posted by: Stan on August 11, 2003 10:59 AM

Mark: So Kurt Vonnegut is now an authoritative economist? Seriously, there are several reasons to give the Player Piano scenario short shrift.

First is to consider the case of agriculture in the developed countries. To an observer from 200, or even 100 years ago, our farms must look like the factories in Player Piano. 200 years ago, around 90% of the workforce worked on farms. Now, due to autmation in agriculture, about 3% do. There has been no trend toward higher total unemployment as agriculture has shed jobs, let alone an 87 percentage-point increase. People moved to the cities and got other types of jobs (and many were ecstatic to do so, judging from contemporary accounts).

Why should we expect any difference in the long term from increased automation in our factories? Yes, the percentage of the workforce involved in manufacturing is shrinking. But again, there is no long-term relationship between this trend and total unemployment.

Second, the changes are not really as dramatic as a superficial look at the numbers. While the numbers of people doing "direct" factory work may be decreasing, more people are involved in designing, making, selling, and maintaining the equipment that is replacing the direct labor, just as there are more people involved with the tractors, combines, harvesters, etc. that are replacing direct agricultural labor.

This is not a new trend. It's been going on for hundreds of years now in all key sectors of our economy, and we are all the wealthier for it (as anyone who has read the Prof's stuff should know). I don't see any reason for this effect to start turning around now.

Posted by: Curt Wilson on August 11, 2003 03:58 PM

Interesting point in Anne’s first post on the price decline of tech equipment masking the volume of capital investment. This looks, in a way, parallel to the rise in labor productivity keeping hours falling while output rises. Workers don’t do better (except perhaps for pay better than it otherwise would be among those who have jobs) despite a growing economy and tech firms profits don’t rise very fast (if at all) despite lots of units of high tech capital being put in place. And wouldn’t you know it, that installation of high-tech capital works to boost productivity, providing a pretty direct link between the two sectors that are doing good for output growth while doing badly themselves.


The replacement cycle article from which Zandi is quoted features trucks. There is more to capital than just high tech. That said, our firm’s desktops are covered with 3-year-old computers, due to be replaced soon.

Posted by: K Harris on August 12, 2003 07:28 AM
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