(FORTUNE Magazine) – DID THE first-quarter speedup in productivity growth herald the long-awaited turnaround in this fundamental measure of economic progress? The short answer is no, the longer answer yes. Productivity is staging a dramatic comeback in manufacturing. It continues to languish in the service sector, but the long run holds signs of hope. After a fast start early in the recovery, the growth of output per hour in the nonfarm business economy stalled. Lagging productivity has put upward pressure on business costs, despite continued wage moderation, and has held down increases in real earnings. Most of the 3.4% rate of productivity growth reported by the Bureau of Labor Statistics for the first quarter reflected a sharp decline in hours worked by the self-employed, which had unaccountably surged last fall. After ironing out this wiggle in the data, FORTUNE estimates that productivity grew at less than a 1% rate during the first quarter. Productivity should continue to rise at the rate of 0.8% over the next year or so, slightly below its new long-term trend, because nonfarm business output is likely to rise no faster than it did last year. The new trend is an improvement on the dreadful 1970s. Since 1979, the last normal year before the back-to-back recessions of the early 1980s, nonfarm business productivity has been expanding at an average rate of nearly 1%. That is almost twice the 1973-79 rate, though it is far below the 2.5% rate of the 1960s. The labor force is growing more slowly, baby-boom workers have become more experienced, and the amount of capital per worker is rising faster. Investment in plant and equipment has been running at 13% of GNP, far above the average for the 1970s. Private and public R&D spending has also rebounded; at 2.8% of GNP, it is close to its 1964 peak. Most of the improvement so far has been won by companies that are chopping costs in the face of fierce new competition and disinflation. Manufacturing productivity has grown at a 3% annual rate since 1979, faster than the rate of the 1950s and 1960s. The U.S. is even improving its performance against the likes of Japan; the gap between its productivity growth and that of its major trading partners is smaller than it has been for most of the past three decades (see chart). The champion productivity boosters tend to be manufacturers most exposed to foreign competition, who have been automating, cutting overhead, closing plants, and reorganizing operations on the factory floor. Since 1979 tiremakers have raised output per hour by 40%, automakers and parts producers by 20%, steelmakers by 18%. Others making giant strides include producers of copper, aluminum, plywood, and cement. Manufacturers of TV and radio components, hard-pressed by the Japanese and the Koreans, increased productivity by three-fourths. Over the next year, manufacturing productivity growth should pick up about half a percentage point, to a 3% pace. Outside manufacturing, productivity gains have been pathetic (May 26). Utilities, transportation, finance, trade, and services account for more than two-thirds of the nonfarm business economy; their productivity has barely budged since 1979. Among the few shining exceptions are recently deregulated industries like airlines, railroads, and telecommunications, where productivity has risen some 20% to 40% since 1979. Still, productivity outside the farm and manufacturing sectors should grow a bit in the year ahead. Part of the service shortfall is illusory. John Kendrick, an economist at the American Enterprise Institute, argues that the government's estimates understate the output, and hence the productivity, of service-producing industries because some are based on hours worked and do not reflect increases in efficiency or quality. The problem is especially acute in dynamic areas such as financial services, says Martin Baily, an economist at the Brookings Institution. The bigger problem may be the inability of management to rapidly assimilate new technologies. Robert Gay and Stephen Roach, economists at the Morgan Stanley investment banking firm, note that productivity failed to grow much for nearly 20 years after the introduction of the assembly line in 1901. $ Economic historians point to similar lags after both the Industrial Revolution and the building of railroads. Gay and Roach think that the spread of computers, telephone data transmission, and the like are comparable to earlier revolutions in technology, calling for a massive transformation in the way business is done. Says Gay, ''It will take time, but if history repeats itself we should see a period of sustained productivity growth down the road.'' That will not help the economy much next year. But an eventual return to yesterday's growth rates would be cause for celebration.

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