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Productivity's ill omen
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August 23, 2001: 10:50 a.m. ET
Researchers says big productivity gains sometimes mark a recession
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NEW YORK (CNNfn) - Since the dawn of the "new economy," strong productivity growth has been a source of pride and hope for the U.S. economy, but a recent study by a leading research group said big gains in productivity aren't always signs of a healthy economy.
The Economic Policy Institute, in an article published on its Web site Wednesday, pointed out that productivity -- a measure of worker output per hour -- has grown even during U.S. recessions, a result of a weaker labor market rather than a stronger economy.
"In a strong economy, hours and output can both grow, so long as output grows at a faster rate, thus resulting in productivity growth," said Thacher Tiffany and Jared Bernstein, the article's authors. "But... productivity can also grow in a slowdown or recession, when a decline in hours outpaces weak or nonexistent output growth."
The recently completed second quarter illustrates this, as productivity grew by 2.5 percent while gross domestic product (GDP), the broadest measure of economic growth, rose only 0.7 percent. And second-quarter GDP could be revised to flat or even into negative territory, based on recent reports on falling business inventories and a widening gap between U.S. imports and exports.
Another example is the first quarter of 1991, when the U.S. economy was in recession. During that quarter, productivity grew nearly 2 percent, while GDP fell more than 4 percent.
"Despite the contraction of output that is the hallmark of recessions, these productivity gains are made possible by another recessionary problem: declines in hours stemming from higher unemployment, fewer job opportunities, and cyclical cutbacks in the work week," the study said.
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Gains in productivity are the key to rising living standards because they allow wages to increase without triggering inflation that would eat up those wage gains. If productivity falters, however, pressures for higher wages could forces companies to raise prices, thus worsening inflation.
Between 1973 and 1995, productivity averaged lackluster gains of about 1 percent per year. But since 1995, led by "new economy" advances in technology, increases have more than doubled, allowing companies to pay workers higher salaries without raising the prices of their products.
Though productivity has slowed in recent quarters, along with the U.S. economy, Federal Reserve Chairman Alan Greenspan has continuously expressed confidence in U.S. productivity, saying he expected the weak economy to hinder growth, but only temporarily.
On Tuesday, the Fed cut its target for short-term interest rates for the seventh time this year in order to keep money flowing through the economy and avoid a recession. 
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