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Saturday, July 03, 2004

Will The Miracle Last? via Bweek

For the past three years, through recession, corporate scandals, terrorist attacks, and massive federal budget deficits, the U.S. has turned in one of the best productivity performances of all time. As companies used new technology and improved business practices to squeeze more output from fewer workers, nonfarm business productivity soared at a 4.5% annual rate. That unexpectedly strong showing -- double the 50-year average of 2.2% -- propelled robust profits as the economy came roaring back. What about the future? is the question at most people minds. On average, nine economists who were interviewed by Bweek, estimate the productivity growth trend to be 2.75% annually over the next few years. The outlook exceeds what most optimists thought possible just a few years ago. "The forces that have driven productivity growth since 1996 still seem to be operating," says Martin N. Baily, an economist at the Institute for International Economics and head of the Council of Economic Advisers under President Bill Clinton.This high level of sustainable productivity growth, if true, carries major consequences for future Fed policy.What's more, sustainable productivity growth is a key indicator of the long-term health of the economy. Over the past 10 years, productivity has risen at a 2.7% rate, translating into higher incomes for most Americans and higher stock prices. If productivity continues to rise at the same rate -- as the economists expect -- the same should hold true for the future. Moreover, strong productivity growth makes it easier for society to pay for defense, Social Security, and Medicare as well as manage the federal budget deficitNo one can offer any guarantees of future productivity growth. But right now it looks like the US economy can grow for the next few years with plenty of new jobs, even as inflation stays tame. Now that's a productivity miracle
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