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June 8, 2001

Bad News at the Bottom Line for the U.S. Economy?

Every corporate CEO knows that it takes more than a reputation to earn profits. How many times has a business periodical printed a splashy spread on an up-and-coming corporate star, only to later report his or her demise in a subsequent issue? No executive, no matter how trendy or glamorous, can survive very long without delivering what shareholders expect at the bottom line. 

What is the bottom line for the managers of the U.S. economy? That's harder to say, but you could make a very strong case that it should be productivity growth, or the improvement in how much we collectively produce per unit of labor. From the point of view of the entire economy, productivity growth is really the only way we can put more bread on all of our tables. When output per hour is rising more strongly, as it has been for the last several years, we can afford wage increases that increase our standard of living without having to pay them back in the form of inflation. 

And the reputation of the U.S. economy for productivity growth in recent years has been stellar. The information revolution that has been embraced by every industry from agriculture to space physics has brought about major changes in how we produce things. Indeed, groups in countries with more sluggish economies have been heard to call for adoption of the "American model" to jump start growth in their regions. 

But reputation alone can't deliver results. Since the fall of last year, the go-go spending of U.S. businesses on plant and equipment that was at the heart of the productivity boom abruptly fell. And the dismal performance of productivity measures since that time should be heeded as a loud warning that the inflation-proof growth of the U.S. economy can no longer be taken for granted. 

It's hard to overstate how bad the performance of productivity was in the first quarter of 2000 for the U.S. economy. For all businesses outside agriculture, output per hour fell at a 1.2 percent annual rate for the first three quarters of the year. Not only was this the first decline in productivity since 1993, but it comes following a year that saw a 4.3 percent improvement in output per hour. 

Meanwhile, compensation jumped up at a whopping 5.1 percent rate in the first three months of 2001. When combined with the fall in output that each worker produces, this means that labor's contribution in costs to each unit of output advanced at a blistering 7.0 percent rate. 

It is often felt that the productivity measures for manufacturing alone are more reliable, since output in the goods-producing side of the economy is easier to objectively measure. And here the news is even more dramatic. On the heels of 2000 when factory productivity surged by 6.9 percent, the first quarter of 2001 saw a 2.1 percent decrease.

Link to this commentary: https://commentaries.cberdata.org/471/bad-news-at-the-bottom-line-for-the-u-s-economy

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About the Author

Pat Barkey none@example.com

Patrick Barkey is director of the University of Montana Bureau of Business and Economic Research. He has been involved with economic forecasting and health care policy research for over twenty-four years, both in the private and public sector. He served previously as Director of the Bureau of Business Research (now the Center for Business and Economic Research) at Ball State University, overseeing and participating in a wide variety of projects in labor market research and state and regional economic policy issues. He attended the University of Michigan, receiving a B.A. ('79) and Ph.D. ('86) in economics.

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