EYE ON
AMERICA An
opportunity for Bernanke By
Peter Morici
On Wednesday, the US
Department of Labor reported that productivity in
the non-farm private business sector increased at
a 1.6% annual rate in the second quarter from the
first quarter of 2006. This was an upward revision
from the 1.1% preliminary estimate published on
August 8.
On a year-on-year basis,
second-quarter productivity in the non-farm
business sector was up 2.5%. That is a solid
performance
and
indicates that the growth potential of the US
economy remains formidable.
The 1.6%
second-quarter productivity gain was sharply lower
than the 4.3% jump scored in the first quarter;
however, the poor second-quarter estimate does not
point to a trend but rather reflects the erratic
nature of quarterly productivity data.
The
absence of substantial inflationary pressures,
outside the volatile energy sector, indicates that
the second-quarter dip was temporary. Only strong
productivity growth would permit non-financial
corporations and manufacturers to continue posting
gains in profits while paying higher wages and
raw-material prices.
Importantly,
non-financial corporations posted a 2.2% gain in
the second quarter over the first quarter and a
4.8% increase on a year-on-year basis. Rising
interest rates hurt performance at banks and other
financial companies, and this pulled down the
average for second-quarter productivity growth for
the entire US economy.
Outlook for 2007
The superior performance of non-financial
corporations indicates that productivity growth in
the United States is likely to re-emerge in the
third and fourth quarters.
The
productivity performance of US factories remained
particularly encouraging. Manufacturing
productivity advanced at a 2.6% annual rate over
the first quarter, and productivity for durable
goods grew at a 3.7% annual rate. The year-on-year
growth rates for all manufacturers and durable
goods were 3.7 and 6.0%, respectively.
Steady interest rates and moderating
energy prices are setting the stage for resurgent
productivity and GDP (gross domestic product)
growth in the fourth quarter and first half of
2006.
A stock-market rally will provide a
leading indicator of better times ahead.
Sustaining permanently strong growth
The continued strong performance in
manufacturing goods raises serious questions about
the large trade deficit and difficulties US
companies encounter competing with imports and
winning export markets. Superior productivity
performance, especially in durable goods,
indicates that US competitive performance in
global markets is held back by an overvalued
dollar, federal budget deficits, skyrocketing
health-care costs, ineffective US energy policies,
and regulatory burdens imposed by Washington.
Were the Chinese yuan and other Asian
currencies revalued against the US dollar, the
shift in resources toward export- and
import-competing industries to reduce the trade
deficit would give productivity a significant
jolt, because these industries exhibit 50% higher
labor-productivity growth and spend much more on
research and development than the rest of the
economy does. Cutting the trade deficit in half
would boost R&D spending enough to push
sustainable productivity growth to 3-3.5% per
year, and potential GDP growth above 4%.
Sadly, President George W Bush's current
policy agenda offers little hope that his
administration will take significant steps to
remedy these pressing problems. His proposals are
reworks of previous initiatives and palliatives.
Rising productivity notwithstanding,
outsized federal budget deficits, the overvalued
dollar, uncontrolled health-care costs, and
ineffective energy-development policies make the
US Federal Reserve's responsibility to maintain
both growth and price stability much more
difficult.
With inflation moderating in
the months ahead, Federal Reserve Bank chairman
Ben Bernanke has a golden opportunity to speak out
on these vital issues.
Strong performance
in non-financial sectors indicates that the growth
potential of the US economy remains closer to 4%
than the 3% now expected. The United States can
accomplish that with the right monetary, fiscal,
exchange-rate, energy and health-care policies.
Peter Morici is a professor at
the University of Maryland School of Business and
former chief economist at the US International
Trade Commission.
