NEW YORK (CNN/Money) -
One hallmark of the U.S. economy in recent years supposedly has been an astonishing rate of productivity growth, which economists hope will produce higher living standards in the future.
But research by Goldman Sachs suggests the recent productivity miracle may have been a mirage.
Many economists have cited high productivity, driven by advances in technology, as one reason for the "jobless" recovery from the 2001 recession.
Since the declared end of that recession, about a million more jobs have been lost; but many economists say this pain will eventually be the economy's gain, since stronger productivity keeps prices low, raises standards of living, and allows businesses to invest more in research and expansion.
The Labor Department's productivity index, which measures output per worker hour at businesses outside the farm sector, rose 5.4 percent in 2002, the strongest gain since 1950.
Since early 2000, in fact, growth of the department's "official" productivity measure has grown at an average annual rate of 3.4 percent, well above Goldman Sachs' estimate of the long-run trend of 2 percent growth.
But Goldman Sachs economists aren't rushing to change their estimates of long-term productivity growth. Instead, in a research note released Friday, they questioned the reliability of the government's numbers.
"While the official productivity data look impressive, alternative measures that are equally reasonable show a much more subdued picture," Goldman Sachs economist Jan Hatzius wrote.
One potential reason for this, Hatzius wrote, is that the Labor Department uses gross domestic product (GDP) in only the non-farm business sector when calculating productivity.
Instead, Goldman Sachs devised an alternative measure, using net domestic product (NDP) for the whole economy. NDP is simply GDP minus the effect of equipment depreciation; Hatzius and some other economists doubt that simply replacing worn-out equipment does much to help the broader economy.
What's more, while the Labor Department uses hours worked per week in the non-farm business sector to come up with an index of output per worker hour, Goldman Sachs instead used the total number of people employed, saying the work week is too hard to measure, especially for workers who don't get paid by the hour.
"What matters for our well-being is the net output -- remember, depreciation charges are not available for consumption -- per person in the overall economy, not the gross output per hour worked in the non-farm business sector alone," Hatzius said.
Using this approach, growth in productivity as measured by NDP per worker has risen at a measly 0.6 percent annual pace since late 2000, a far cry from the 3.4 percent rate the department has reported and from the estimated long-term trend rate of 2 percent.
Hatzius said other data back up the notion that productivity is not as strong as everybody seems to think:
- U.S. exporters continue to struggle with a strong dollar; higher productivity should have given them the power to survive a strong dollar, which tends to make their goods less competitive overseas
- Profit margins haven't improved noticeably in recent years, despite the apparent jump in productivity
- Strong productivity usually goes hand-in-hand with strong investment in plants and equipment, which hasn't been the case recently
And Hatzius suggested the future of productivity growth looks pretty grim, too.
For one thing, businesses aren't spending as much on productivity-enhancing improvements as they did in the late 1990s.
What's more, the not-so-productive U.S. government's share of GDP is rising, especially with increased spending on defense and homeland security. Meanwhile, the job losses in recent years have led to a political backlash against free trade.
Though analysts doubt many protectionist measures will be implemented, simply freezing the process of trade liberalization could increase the cost of doing business and make many companies less productive, some economists argue.
"We continue to believe that the underlying drivers of productivity growth are turning less favorable," Hatzius wrote.
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