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US Experiences Suprisingly Strong Economic Productivity Growth - 2002-05-25

Preliminary estimates indicate the U.S. economy experienced surprisingly strong productivity growth during the first quarter of 2002.

Boston College economics professor Bob Murphy says such productivity surges are common when an economy begins moving out of recession. "That is because businesses start to produce more goods and services without hiring more workers until they are sure the recovery is underway," he says. "As people are rehired and employment growth returns to normal, (U.S.) productivity growth will slow somewhat, and the question is: How much?"

After growing at the relatively low rate of one to one and a half percent per year during the early 90s, U.S. productivity growth doubled to 2.5 percent annually in the late 1990s.

If productivity growth levels fall, Mr. Murphy says, that means the surge at the end of the 90s was an exception. If they stay strong, that could mean the nation is heralding in a new era of higher productivity.

Economist Richard DeKaser believes the high levels will continue. In general, he says, productivity growth increases in response to two types of stimulus. "One is newer and better equipment with which to work. And over the 1990s there was an investment boom in spending on information technology, giving workers better equipment with which to do their jobs," he says.

Once you invest in new equipment, Mr. DeKaser says, it takes time to figure out how to use it most efficiently and how to combine technologies in ways that enable more work to be done in less time. "Years ago we had computers, and for the most part they were stand alone machines," he says. "But through the introduction of the Internet and the use of phone lines, we are able to combine those technologies in new and more efficient ways and realize synergistic gains which exceed those that could be derived from either of these two things."

Bob Murphy believes U.S. productivity rates were low in the early 1990's because there is always a lag time between when new technology is introduced and when it begins to improve output. "It takes time for people to figure out how to use new technologies in an efficient manner," he says. "It takes time for people to figure out how to rearrange the structure of their office or their factory in order to implement computer technologies, so there is usually a lag."

But the lag is over, Mr. Murphy says. He expects U.S. productivity gains to continue to surge, at least for the near future. Business investment levels are low today, he warns, and that could mean a slowing of productivity growth about 10-years down the road.