Productivity Gains, How Permanent?

This Economic Commentary confirms unusually robust productivity growth of the last few years and explores reasonable assumptions about the likely future pattern of productivity growth. These assumptions can generate substantially different productivity growth paths. Government forecasts, which guide the major tax and benefit programs, have been increased in recent years yet remain cautious.

Recent measures of economic output show the economy has slowed dramatically, suggesting the current expansion may be coming to an end. While many are now awakening to the possibility that even the "New Economy" may experience negative output growth, it is impossible to ignore productivity's exceptional performance over the last five years. The accelerated growth we have seen was largely unanticipated outside of ardent proponents of the "New Economy." Regardless of the fate of this expansion, productivity growth is a key factor in all long-term economic forecasts, and policymakers responsible for planning various spending may now need to reevaluate their assumptions about long-run productivity growth.

Accurate forecasts of future productivity growth are important because even small changes have big effects over time. For example, a half-percent increase in productivity growth may sound small, yet it could add $1.2 million to the 10-year forecast of the federal budget surplus. [1] Social Security solvency estimates are also dramatically altered by assumed rates of productivity growth. That same half-percent increase would cut the cost of a 50-year fix to Social Security in half. [2] Indeed, any estimates of gross domestic product more than a few quarters into the future critically depend on what one assumes productivity will be.

By contrasting patterns of productivity growth over postwar expansions, this Economic Commentary shows the varied views policymakers may draw about the likely future pattern of productivity growth. In doing so, we update and expand the analysis of a prior Economic Commentary, "Productivity Gains During Business Cycles: What's Normal," written in July 1998. At that point in the current expansion, productivity had only just begun to show signs of unusually large late-cycle growth. Using similar statistical techniques, we show that this acceleration has continued over the last few years. We also examine some of the factors that contribute to productivity growth in order to understand better what might have led to the current surge and what is likely to occur in the future. …

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