(FORTUNE Magazine) – A bedtime tale about broadloom.

Not so long ago in a faraway land, interior designer Michele Lyden won a role in the refurbishment of the massive convention center in Columbus, Ohio. Time, however, wasn't on her side. The job had to be done in a few short months, and a big priority was the carpeting--half a million square feet of it, enough to cover more than 11 football fields. So in March, Lyden, an associate at Atlanta-based TVS Interiors, flew out to Lees Carpets in Virginia, an offshoot of textile giant Burlington Industries, and sat down with Allen Parker, vice president of custom design, to start the arduous process of finding just the right pattern and color. It had to be a design that would work in vast open spaces and that wouldn't feel dated in a year, of course. And then all those colors to choose from. But rather than having to wait weeks for a tiny swatch to show her client, she walked away with a virtual sample that day.

It happened like this. Lyden sat at a computer screen and viewed hundreds of combinations of designs and colors until she was able to narrow down her choices. Then she printed out copies of her favorites. But these were no ordinary printouts. The computer managed to produce a full-color simulation of a carpet sample that, when laid on the floor, looked about as close to the real thing as you could get. Not only was the printout true to scale, it also had extremely high resolution, so that every stitch stood out to highlight the woven texture of the carpet.

As surprised as Lyden was to walk out with a virtual swatch of the carpet she'd created that morning, the more startling benefits of the new technology have clearly gone to the manufacturer. The accelerated design system has won more customers for Lees Carpets, and it has also reduced the turnaround time for its custom strike-off business by 70%, Parker estimates. Then there are major efficiency gains. By not having to interrupt its machines to produce small batches of woven samples, Lees can make more carpet with the same amount of equipment. And that adds up to one achievement: Lees' workers have soared through their productivity goals. Total investment in new technology: $500,000.

Nor does it end there. Lees is also planning new ways to incorporate its existing technology into other aspects of its business. For example, Parker envisions a time when Lees will use the computer system, which is 99% color accurate, to create dye formulas, further speeding up the production process.

Carpeting may seem like an odd, even pedestrian emblem for the great turn-of-the-millennium productivity revolution. But that's just the point. America's new engines of efficiency have been everywhere--from floor to ceiling and wall to wall--these past several years. And they have driven U.S. labor productivity, according to the latest estimates, to an astounding 5.7% annual growth rate, double the historic average, and the fastest multiyear pace since before Neil Armstrong stepped on the moon. More amazing still is how much that figure has surged in the past two years--even after a decade-long hyperdrive performance that fueled the nation's longest economic expansion.

This feat of efficiency, of course, has been at the very heart of our growth, rising living standards, low inflation, and booming housing and stock markets. It has boosted corporate profits and lifted shop stewards into the ranks of 401(k) millionaires. But on top of such achievements, the "new paradigm" of productivity has led CEOs (and Wall Street analysts) to justify the sky-high valuations of many stocks by arguing that future profits can continue to grow well beyond their historical norms. Without a doubt, it has been the productivity miracle that has kept the Bull alive this long. The question is--and it's a question that's been on many minds lately with the stock market as jumpy as it is: How much longer can the miracle continue?

Well, happily, there's a strong case to be made that the productivity boom is just getting started. Whether it's a carpet king, a giant homebuilder, a trucking company, or the world's biggest semiconductor maker, new information technology is having a lasting effect. "Our productivity is awesome," says Bruce Steinberg, chief economist for Merrill Lynch. "We have this remarkable explosion in technology that doesn't show any sign of slowing."

Federal Reserve Chairman Alan Greenspan agrees. In recent years he's been a believer in the productivity revolution, but last month at a gathering of the world's policy elites, the normally cautious chairman was surprisingly upbeat about the future. "This extraordinary period of technological advance continues to exhibit great vitality," he said, even adding that he saw little "credible evidence" that the acceleration in underlying productivity was about to end. While publicly Greenspan isn't specific about how much longer he thinks productivity can continue its growth spurt, privately he's known to believe we may still only be at midcycle.

If he's right and there are another five years or so of rapid productivity growth to come, some argue the economy can keep expanding at its lightning pace without fear of inflation, just as companies can continue to boost their profit margins beyond current expectations. "Once in every two generations you see a shift in the economy of this magnitude," says Ethan Harris, senior economist at Lehman Brothers. "Over the long haul, we think that means the new speed limit for the economy is much higher than the standard 3%. It's more likely to be 4.5%."

There's plenty at stake in figuring out where we are in the productivity cycle--not the least of which is the answer to whether stocks are still a good buy or not. No wonder it seems every economist these days is frantically locked in his office, poring over spreadsheets to come up with the right model.

The problem has been that, until recently, economists weren't even sure how we got up this mountain in the first place. This year, though, several important studies released by the Fed and others have managed to quantify the two major thrusts of the productivity surge: the accelerating pace of technological change, which has led to falling computer prices, and the increasing business investment in new technology (see charts).

The numbers are revealing. In the past year alone, while computing capacity has doubled, costs have risen only 10%. At the same time, thanks in part to low interest rates and a plentiful supply of funds from foreign investors, business investment in technology and equipment has climbed to 10.6% of GDP, its highest share ever. These are the mechanics behind the miracle.

Look at Boeing, for example. In the early 1990s, Boeing invested heavily in new technology so that it could design a commercial aircraft, the 777 twinjet, entirely by computer. It connected 1,200 engineers and countless other staffers to 2,200 workstations and four mainframes, in Seattle, Philadelphia, the Midwest, and Japan. That technology enabled the aircraft manufacturer to solve virtually every design problem through computer animation--that is, without having to build a nuts-and-bolts prototype--and thereby limit the cost of making design changes down the line. For instance, when a team of engineers discovered a glitch in the jet's wiring, they "fixed" it instantly on their 3-D digital model. The technology cut the design time for the 777 in half. (For more on the company, see "Boeing vs. Boeing" in this issue.)

Or take old-economy Schneider National, which is the country's largest trucking company, based in Green Bay, Wis., with some 40,000 trailers and 15,000 drivers. For Schneider, being productive simply means keeping its trucks on the road. The faster a mechanic can fix a truck, the faster it can make its next delivery to Wal-Mart. Previously, mechanics at 24-hour maintenance facilities around the country had to consult a cumbersome--and often out-of-date--600-page service book to guide them through repairs of any of the thousands of things that could be wrong with a rig.

This year, Schneider installed a computer terminal in each of its 26 maintenance centers, all connected via an intranet, so that mechanics could access up-to-date diagrams and data for fixing a cam shaft or an electrical fault in any number of vehicle models. Mechanics, on average, can now fix 20% more tractors, according to company estimates.

Whether productivity will accelerate from this point, however, depends on how well companies can continue the pace of technological innovation. A big issue, say experts, continues to be capital spending. And at least there's no sign of a slowdown. New orders for technology jumped 29% in the second quarter from the same period a year ago. According to Merrill Lynch's Steinberg, there's a strong correlation between spending on new technology and productivity gains 2 1/2 years down the road. Breakthroughs in robotics, chemical engineering, and genetics, fodder for the science-fiction movie industry for years, have moved from "within reach" to "in practice."

"We're just at the beginning," contends Hans Moravec, head of the robotics lab at Carnegie-Mellon and author of several books on the topic. He wryly describes the sophisticated computer equipment installed on many factory floors in the past five years as equivalent to the reptile stage on the evolutionary scale. Whatever the stage, says Richard Berner, chief economist at Morgan Stanley Dean Witter, it's clear that each new breakthrough is having a ripple effect. "As one company changes its business model, it affects its customers and suppliers, and they begin to change the way they operate too."

Indeed, some of those rippling changes seem rather minor at first. For chip titan Intel, an effort to encourage its customers to conduct business online has meant a surprising boon for productivity. The company's customer service department can now deal with 40% more orders than it previously could. Then there's the purchasing side. Intel has 40 of its top suppliers online and plans to wire the rest by 2002. And manufacturing--where management has automated many of its decision-making processes, vastly cutting the time it takes to produce computer chips.

In its assembly and test operations, for example, it has cut throughput times by 80%. "We call it the cellophane factor," says Intel's director of e-business, Sandra Morris. "When you take the wrapping off, you see a lot of things that don't make sense and can be done more efficiently."

Another recent example: With 80,000 employees companywide, Intel had a haphazard spending-approval system in place. When executives examined their procedures, they found that each division and group in the organization used a different method. Some required up to 20 signatures on an order for new equipment, while others asked a department head to sign off on trivial items like new pens. Then, in April, the company introduced a vastly simplified online system for all its divisions that requires a single signature per purchase. "The whole thing frees up hours for many people," says Morris.

Executives have also made a warlike effort to arm their work force with pagers, cell phones, and laptops that can be connected to the company's secure Internet site. Today some 40,000 Intel employees can work on group projects from anywhere in the world.

Overkill, perhaps? Well, put it this way. After a quick executive meeting last spring, in which top Intel brass examined the costs and benefits of a fully mobile work force, Chairman Andy Grove and CEO Craig Barrett ordered home PCs for every Intel employee, to boot--even for those who had recently retired.

It's clear from the data that the manufacturing sector has recorded huge productivity gains. But the all-important service sector--which employs more than 80% of the nation's work force and accounts for 56% of GDP--is another matter. With psychiatrist or bank-teller "output" far harder to gauge than, say, counting widgets or beer bottles on a factory line, economists have faced endless headaches to come up with a statistical measure for service productivity. The traditional way has been to calculate the total cost of providing a particular service (as a proxy for output) and then divide that by the number of workers involved.

By such analyses, say economists, service productivity has actually been stagnating for the past two decades (though some believe the real figures have been understated). All of a sudden, however, even the service sector seems to be catching on. Second-quarter figures estimate that service productivity growth is now running at an annual 6% rate, outpacing the manufacturing sector for the first time in two decades.

A good example of this renaissance in service productivity can be seen in Freddie Mac, one of the country's biggest mortgage underwriters. Last year it launched its Loan Prospector system on the Internet, a system that automatically--and almost instantly-- decides whether to underwrite a home loan. For Freddie Mac the benefits have been enormous. Its transaction volume has gone up 200% this year without the group's adding any more staff. And they're hardly quitting now, says Tonya Jackson, vice president of transactions processing. "We're in the middle of a huge initiative to fully automate our entire delivery process."

Again, this productivity gain is rippling across to Freddie Mac's customers. Loralynne Ball, a broker for Mills Mortgage in St. Petersburg, has seen the number of her closings jump 35% this year--without working longer hours. "With Loan Prospector I have to fill out only 40 fields for a credit application," explains Ball. "A standard loan application has three times as many."

Some economists worry that, with the labor force already plumbed to its depths, it will be nearly impossible to grow the economy at the same blistering rate for much longer. After all, new technology requires an ever more skilled work force to run it.

But one big surprise is how much of the recent growth has come without the creation of more jobs. James Paulsen, chief investment officer at Wells Capital Management in Minneapolis, compared annual economic output with job growth since 1950. From 1990 to 1994, for example, each 1% bump in GDP was correlated with a nearly 0.8% rise in jobs. But in the past four years, the number of positions created for each new percentage point of output has shrunk dramatically. Only 0.1% new jobs were added per 1% growth in GDP.

That's consistent with what USAA has discovered. Each year 60 million pieces of mail--most of it checks--arrives at the insurance giant's sprawling headquarters in San Antonio. Today high-speed bank extraction machines do the sorting that not long ago was done by hand. As the software has gotten better over time, the error rate has been sharply reduced. Thus, the company has been able to cut the number of employees in its payments department by half in just a few years.

As important as IT is to the new paradigm, the heroes of this productivity boom aren't limited to techies. At the country's largest home builder, Kaufman & Broad, a transformation is going on, and it all came about thanks to one of its employees in a branch office.

Bill Harrel, operations manager in K&B's Phoenix office, was fed up. Over lunch at Applebee's with longtime friend and subcontractor Gary Burleson, he complained about the number of blueprints piling up in the office and the time and money involved with getting them out to subcontractors so that they could bid on projects. With one project typically involving eight plans and 80 bidders--each needing a copy of every plan--and with hundreds of projects going on at once, the effort involved to coordinate bidding was overwhelming. Burleson suggested looking at the Internet for a way to do things better. After lunch, Harrel discussed the matter with colleague Kimberly Clark, and together they came up with a plan.

Six months later the Phoenix office launched KB Bid.com, a secure Website on which all its building plans are stored and can be accessed by thousands of painters, builders, roofers, and the like across the country. What started in the Phoenix office in January is now being rolled out to the group's 15 other offices. Even at this early stage, K&B calculates it has already saved $1 million.

So how much more can productivity improve? Paul Strassmann, a former head of IT at several large corporations, including Xerox, General Foods, and Kraft, and now a researcher on productivity, has actually put a number on it. Using a calculation based on information costs, compensation levels, and IT spending at 10,000 publicly listed corporations, Strassmann claims that at least 40% of America's companies could strongly improve their productivity if they used their capital and labor force more efficiently. "Everyone has the same technology," he says. "But it's got to be well integrated with the management of the company."

While that seems like a negative sign, Strassmann says it's actually quite encouraging. "Think of all that room for improvement."

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