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Productivity: Nonfarm Business vs. Nonfinancial Corporations

What do we know about the pace of underlying productivity growth? Daniel Gross reports:

Productivity Is Up. Or Down. Pick Your Statistic. - New York Times: When the growth rate of productivity - the amount of output an hour the economy can produce - falls sharply, it's frequently a sign that dreaded inflation could be on the rise. When productivity growth rises smartly, it may indicate that companies are figuring out how to make more goods and services while keeping costs under control.... [I]n July, Mr. Greenspan acknowledged that he was a little puzzled by the recent productivity figures. "The traditional measure of the growth in output per hour," he said, "has slowed sharply in recent quarters." (Translation: productivity growth is way down, look out for inflation.) "But," he continued, "a conceptually equivalent measure that uses output measured from the income side has slowed far less." (Translation: maybe not.)

The "traditional measure" to which Mr. Greenspan referred is nonfarm business productivity.... The year-over-year growth rate of nonfarm business productivity fell from an impressive 4.2 percent in the second quarter of 2004 to a less impressive 2.3 percent in the second quarter of 2005. The "conceptually equivalent measure"... is... nonfinancial corporate businesses. This less broad measure excludes the gigantic financial sector and gauges productivity by examining the incomes of corporations, not their output.... [T]he year-over-year growth rate of nonfinancial corporate productivity has risen sharply, to 5.4 percent in the first quarter of 2005 (second quarter statistics for this measure are not yet available) from 3.2 percent in the second quarter of 2004.

In theory, the two measures of productivity should match up, even though they employ somewhat different methodology and data. And over the long term, they do.... In principle, economists say, the figure that represents the broadest possible swath of the economy is preferable.... [But] it's much easier to calculate productivity for companies that produce widgets than it is for companies that produce less tangible goods like insurance policies.... [I]t strikes some economists as strange that including the dynamic financial sector would somehow make the economy seem less productive. "If you see productivity being dragged down by the inclusion of the financial sector, you have to be a little suspicious," said David Altig....

[T]he tale of the two productivity figures isn't merely of academic interest. This conundrum has the potential to make the remaining months of Mr. Greenspan's tenure more difficult. "If productivity is in fact slowing, the Fed will have to be more aggressive in raising rates to slow growth," Mark Zandi, chief economist at, said. Otherwise, inflationary forces will develop, especially if labor costs rise. On the other hand, if productivity growth is stronger, then the Fed doesn't need to be as hawkish.... "Given the divergence between these two readings," as Mr. Greenspan put it... "a reasonably accurate determination of the extent of the recent slowing in productivity growth and its parsing into cyclical and secular influences will require the accumulation of more evidence." (Translation: ask my successor about this next year.)