Preliminary – Comments Welcome
Potential Growth of the U.S. Economy: Will the Productivity Resurgence Continue?
Dale W. Jorgenson, Mun S. Ho, and Kevin J. Stiroh∗ November 17, 2005
Abstract
This paper analyzes the sources of U.S. productivity growth through 2004 and presents mediumterm projections for the U.S. economy. We attribute a substantial portion of productivity gains over the past decade to production and use of information technology equipment and software. In the most recent years we also identify a growing contribution from sources outside the technology-producing sectors. Our base-case projection for the GDP growth rate is almost exactly three percent. We emphasize the substantial range of uncertainty by presenting an optimistic projection of 3.5 percent and a pessimistic projection of only 1.9 percent.
∗
Adam Smith Award Address by Jorgenson to the National Association for Business Economics, Chicago, IL, September 26, 2005. Jorgenson: Department of Economics, Harvard University, Cambridge MA; phone: (617) 4950833; email:
[email protected]. Ho: Resources for the Future, Inc., Washington, DC; phone: (202) 3285153; email:
[email protected]. Stiroh: Assistant Vice President, Federal Reserve Bank of New York, New York NY; phone: (212) 720-6633; email:
[email protected]. We are grateful to Jon Samuels for excellent research assistance. The views expressed in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of New York or the Federal Reserve System.
Introduction The unexpected resurgence of the U.S. economy since 1995 is well-documented and widely understood. A consensus has emerged that a substantial portion of the acceleration through 2000 can be traced to the sectors of the economy that produce information technology (IT) or use IT equipment and software intensively.1
The increasing strength of the U.S.
productivity performance since the end of the 2001 recession, however, is less well understood. These recent developments have important implications for our understanding of medium-term trends in the U.S. economy. The purpose of this paper is to incorporate the latest productivity data into new projections of the future growth of the U.S. economy. We begin with a comparison of U.S. productivity growth after the 2001 recession with earlier business cycles.
We extend our
analysis of the sources of productivity growth through 2004 and identify the factors that underlie the robust performance of recent years. Finally, we use the new estimates to provide mediumterm projections of U.S. economic growth. We project labor productivity growth for the U.S. economy at 2.25 percent per year for the next decade.2 The continued strength of technological progress and the rising importance of investment in IT equipment and software imply higher trend productivity growth rates. On the other hand, the aging of the U.S. labor force acts as a drag on productivity growth as enhancements in labor quality due to gains in education and experience of the workforce continue to slow. On balance these developments are very favorable for the future prospects for U.S. economic growth and support our view that the technology-led productivity revival will continue. I. Recent Productivity Trends The Bureau of Labor Statistics (BLS) is the official source of “headline” productivity estimates for the business, non-farm business, and manufacturing sectors of the U.S. economy. The most recent estimates were released in November 2005 and cover the period through 2005:Q3 (BLS (2005)). These data, presented in Figure 1, show that productivity growth since 1
See Jorgenson, Ho and Stiroh (2005) and the references given there. In this paper, productivity refers to output per hour worked, unless otherwise indicated.
1
1995 has averaged twice the rate of the previous two decades. To be precise, productivity growth increased from 1.46 percent for the period 1973:Q4-1995:Q4 to 2.91 percent for the period 1995:Q4-2005:Q3.3 The sharp acceleration in productivity growth in recent years indicates a higher trend growth rate. Sustained productivity growth at 2.92% per year during the ten-year period ending in 2005:Q3, for example, signals the highest growth since the 3.05% growth for the ten-year period ending 1971:Q1. While the post-1995 period includes the boom of the late 1990’s, it also includes the NASDAQ collapse in 2000, the 2001 recession, the 9/11 terrorist attacks, an investment bust, corporate accounting scandals, the war in Iraq, and rising oil prices. The increasing strength of productivity growth through this period is nothing short of phenomenal! Figure 1 also reveals the cyclical character of productivity growth, which typically slows when the economy enters recession and accelerates afterward. The 2001 recession follows this pattern, but the decline is not as great and the recovery is much stronger. To examine this cyclical behavior more closely, we compare productivity performance around the 2001 recession to other recessions in Figure 2.4 This comparison highlights the strength of productivity growth in recent years. Non-farm productivity was 11.5% higher after three years from the beginning of the 2001 recession, compared to 4.6% gains for the average recession from 1973 to 2000 and 7.2% for the average recession from 1947 to 2000.5 The performance of productivity was a major surprise and created a considerable challenge for analysts of the business cycle. The NBER Business Cycle Dating Committee, for example, pointed to the gap between output and employment growth in 2002 and early 2003 as a major concern in dating the end of the 2001 recession.6 The 2005 Economic Report of the President attributed weakness in employment growth to the strength of productivity. We next turn to the sources of U.S. productivity growth.
2
Note that these estimates are for the full economy, while the higher estimates in Jorgenson, Ho, and Stiroh (2002, 2004) refer to the private business economy. 3 These estimates refer to the non-farm business sector and are average annual growth rates, calculated as log differences. 4 The estimates for 1973-2000 normalize the productivity series at the beginning of each recession and average the productivity level across four recessions, while the estimates for 1947-2000 average across nine recessions. 5 These estimates differ from those in Jorgenson, Ho, and Stiroh (2004), due to the annual revisions to the U.S. NIPA incorporated into the BLS productivity program in August 2005. 6 See the memo from the NBER Business Cycle Dating Committee from October 2, 2003 at http://www.nber.org/cycles/recessions.html.
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II. Explaining U.S. Productivity Growth We employ standard growth accounting techniques to quantify the proximate contributions to the growth in productivity from increased inputs of labor and capital services, as well as residual growth of total factor productivity (TFP), defined as output per unit of both capital and labor inputs. This section briefly outlines our methodology, data sources, and empirical estimates.7 Before proceeding, it is important to distinguish our new estimates from the data we reported in Jorgenson, Ho, and Stiroh (2002, 2004). Here, we explore the sources of economywide productivity, while our earlier work used a similar, but not identical methodology, to examine productivity for the private economy.8
By including the government sector and
examining economy-wide productivity, we are able to focus on the factors driving GDP growth. a) Growth Accounting Average labor productivity (ALP) is defined as the ratio of output to hours worked. Under assumptions of constant returns to scale and competitive factor markets, the growth of ALP can be decomposed into three sources. The first is capital deepening, defined as the increase in capital services per hour worked. The explanation is that workers become more productive if they have more and better capital with which to work. Examples include an accountant with a faster computer or a manufacturing worker with a more sophisticated, numerically-controlled, machine tool. The second source of labor productivity growth is labor quality, defined as labor input per hour worked. This reflects changes in the composition of the workforce. As firms substitute workers with more experience and education for the less skilled, average labor productivity rises. The third source is total factor productivity (TFP) growth, which reflects the labor productivity growth not attributable to capital deepening or labor quality gains. This is often associated with improvements in technology, but also includes changes in utilization rates, reallocations of resources among sectors, increasing returns to scale, and measurement error. The framework of growth accounting can be extended in two ways to highlight the important role that information technology (IT) plays in the U.S. economy. First, economy-wide TFP growth can be allocated between gains in the IT-producing industries and gains in the rest of 7
Additional methodological details are given in Jorgenson, Ho, and Stiroh (2002).
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the economy.
This allows us to quantify technological progress in the production of IT
equipment and software, for example, the ability to produce faster and more powerful computers at lower prices.9 Second, capital deepening can be decomposed into the part that reflects more intensive use of IT capital, such as computer hardware, software, and telecommunications equipment, and the part resulting from investment in other types of capital. b) Data Our output estimates are based on data from the U.S. National Income and Product Accounts (NIPA), published by the Bureau of Economic Analysis (BEA). The national accounts feature gross domestic product (GDP) as a measure of output. This is more comprehensive than the output measure used in the official labor productivity statistics published by BLS. We include the government and nonprofit sectors of the economy, as well as the services provided by residential housing and consumer durables. By contrast, BLS and the Congressional Budget Office (CBO) focus on the private sector. Our capital input estimates are based on the Fixed Asset accounts published by BEA. These accounts present business and government investments and consumer durable purchases for the U.S. economy, including detailed asset classes, such as computers, office buildings, and 1-to-4 family homes. We employ a broad measure of capital that includes fixed assets owned by businesses, governments, and households, as well as land and inventories. Our prices for capital services use asset-specific values for price changes, service lives, and depreciation rates for each type of asset. Our labor data incorporate the decennial Censuses of Population for 1960-2000, the annual Current Population Surveys (CPS), beginning in 1964, as well as labor statistics compiled by BLS and presented in the NIPA. We take total hours worked for domestic employees directly from the NIPA, self-employed hours worked for the non-farm business sector from the BLS, and self-employed hours worked in the farm sector from the Department of Agriculture. Labor input is a quantity index of hours worked that captures the heterogeneity of the workforce. We classify workers by sex, employment class, age, and education levels and weight the hours for each type of worker by labor compensation.
Labor quality growth reflects the difference
8
Historically, GDP growth has been about two tenths of a percentage point slower than growth in the business sector, but this divergence has widened over the last decade to about four tenths. 9 As a practical matter, we estimate IT-related TFP growth from relative price changes. A fall in the ratio of IT prices to input prices reflects TFP growth in IT production.
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between the growth rates of the compensation-weighted index of labor input and an index of hours worked. c) Empirical Results Table 1 presents the growth of output and allocates this growth between hours worked and labor productivity. We examine the period 1959 to 2004, and three sub-periods 1959-1973, 1973-1995, and 1995-2004.10 We are particularly interested in the U.S. growth resurgence after 1995, so we also report the difference between the average growth rates in 1995-2004 and 19731995. Output grew 3.34 percent per year for the period 1959-2004. The post-1995 increase in output growth was 0.75 percentage points from 2.84 percent per year for 1973-1995 to 3.59 percent for 1995-2004. This reflects a gain in average labor productivity (ALP) growth of 1.25 percent, partly offset by a decline in the growth of hours worked of 0.51 percent. Note that these data include the 2001 recession and the sluggish employment recovery that followed. They also reflect the most recent annual revision of the NIPA, released on July 29, 2005. The next seven lines in Table 1 report the growth accounting decomposition of average labor productivity growth. For the full period 1959-2004, ALP grew at 1.96 percentage points per year. Capital deepening made the greatest contribution of 1.04 percent, followed by total factor productivity growth of 0.63 percent and labor quality growth of 0.28 percent. This ranking also holds for each sub-period and highlights the leading role of investment throughout the period, as the composition of capital deepening steadily shifted toward a greater role for information technology equipment and software. The final column describing the post-1995 growth resurgence demonstrates the important role that the two IT channels have played. Of the 1.25 percentage point increase in ALP growth after 1995, 0.62 percentage point was due to capital deepening and 0.72 due to faster TFP growth. Labor quality growth continued its slow decline, falling by –0.09 percentage point. Focusing on IT, the contribution by IT-producing industries accounted for more than 30 percent of the increase in aggregate TFP growth, far exceeding the 3.9 percentage share of IT equipment and software in aggregate output. This substantial contribution reflects the astounding rates of technological progress in IT production. Almost two-thirds of the increased capital deepening was attributable to IT, although information technology equipment and software was only about
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one-sixth of fixed investment from 1995-2004. This outsized contribution reflects the rapid accumulation of IT capital and its high marginal product. What are the economic forces that underlie our growth accounts? The story begins in the IT-producing industries that make information technology equipment and software.
Rapid
technological progress has allowed each generation of new equipment to readily outperform prior generations. This technological progress is captured by “Moore’s Law,” the doubling of computer chip density every 12-24 months.
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As a consequence, the performance of IT has
improved as prices have fallen. This is captured in the high rates of TFP growth in ITproduction. In response to the spectacular price declines for IT investment, firms have quickly substituted IT assets for other productive inputs. This massive investment in IT, near 20 percent of nonresidential fixed investment in 2004, is represented in the large contribution of IT capital deepening to labor productivity growth.12 IV. Projecting Productivity Growth The future of productivity growth is a critical issue for the U.S. economy, but a key challenge is to distinguish permanent changes from temporary shocks.
Projections require
assumptions about technological progress and substitutions among different types of investment and workers that are difficult to quantify. These difficulties have led to a wide range of estimates and substantial revisions.
This section discusses our methodology, presents our empirical
results, and compares our estimates to estimates by the Congressional Budget Office (CBO), Council of Economic Advisors in the Economic Report of the President (CEA), and Board of Trustees of the Social Security Administration (SSA).13 a) Methodology and Data We make two key assumptions that are consistent with the experience of the U.S. and other developed economies over time periods longer than a typical business cycle. First, we assume that output and the reproducible capital stock grow at the same rate. This smoothes fluctuations like the investment boom of the late 1990’s and the investment bust during the 2001 recession. Second, we assume that hours worked grow at the same rate as the labor force, which implies that the unemployment rate, labor force participation rates, and hours per worker remain 10
Computer and software investment data begin in 1959; 2004 is the last year for which complete data are available. A more detailed discussion of Moore’s Law is presented by Jorgenson, Ho, and Stiroh (2005). 12 This share reflects investment by businesses, consumers, and the government in IT equipment. 11
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constant. These assumptions are appropriate for projections of the potential growth of output, but would obviously be unsuitable for short-run forecasting of output and productivity growth. We also require projections of the output shares of capital and labor, the share of IT output in total output, the share of reproducible capital stock in total capital, capital quality growth, labor quality growth, and TFP growth. Some of these variables can be projected with considerable confidence, while others involve much greater uncertainty. We present a single value for the variables we consider relatively easy to project -- labor quality growth, growth in hours, and the shares of capital, reproducible capital stock, and IT output. For IT-related TFP growth, non-IT TFP growth, and capital quality growth, the variables that are more difficult to project, we present base-case, pessimistic, and optimistic scenarios in order to emphasize the uncertainty inherent in the projections. We first discuss the variables that are the same for all three scenarios. For growth in hours worked and labor quality, we construct our own projections of demographic trends, based on the demographic model of the Bureau of Census. This breaks the population down by individual year of age, as well as by race and sex. Our estimates suggest that hours growth will be about 0.72 percent per year and that growth in labor quality will be 0.09 percent per year for the ten-year period 2005-2015. Both are considerably slower than our earlier projections, due to a later time period and the introduction of more recent Census population estimates. The capital share of GDP fluctuates, but does not show an obvious trend over the past 40 years, so we assume it remains constant at 41 percent, the average for 1959-2004. Similarly, the fixed reproducible capital share in total capital exhibits no trend and we assume it remains constant at 84.3 percent, the 1959-2004 average. We also assume the IT output share stays at 3.9 percent, the average for 1995-2004. This may be conservative, since IT has steadily increased in relative importance. For the variables that vary across scenarios – IT-related TFP growth, non-IT TFP growth, and capital quality growth – we rely on technology expertise as well as the historical record. Our base-case scenario incorporates data from the period 1990-2004, combining periods before and after the growth acceleration dating from 1995. The optimistic scenario assumes the patterns of 1995-2004 will persist, while the pessimistic case assumes that the economy reverts to 19731995 averages. 13
Additional details about our methodology are presented in Jorgenson, Ho, and Stiroh (2002).
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For IT-related TFP growth, the year 1995 marked an acceleration of the pace of technological progress that can be seen in the increased pace of IT price declines and faster TFP growth in the IT-producing industries. Jorgenson (2001) argues that this shift was triggered by a much sharper acceleration in the decline of semiconductor prices that can be traced to a shift in the product cycle for semiconductors in 1995 from three years to two years as competition intensified.14 Whether this reflects a permanent or transitory development is critical in gauging the likely speed of TFP gains in IT-production, but there is considerable uncertainty. The 2004 edition of The International Technology Roadmap for Semiconductors, a detailed evaluation of semiconductor technology performed annually by a consortium of industry experts, projects a return to three-year product cycle after 2004.15 Intel, however, has recently announced its intention to maintain a two-year product cycle (Lammers (2004)). Our base-case scenario averages the two-year and three-year cycles observed in the 1990’s and projects TFP growth for each of the IT components from data for 1990-2004, which yields IT-related TFP growth of 9.8 percent. Our optimistic projection assumes that the two-year product cycle for semiconductors continues, so that IT-related TFP growth reflects rates for 1995-2004 and continues at 11.05 percent per year. Our pessimistic projection assumes the semiconductor product cycle reverts to the slower pace of 1973-1995, so IT-related productivity growth equals 8.67 percent per year. In all three cases, the contribution of IT to aggregate TFP growth reflects the 1995-2004 average output share of each IT component. The TFP contribution from non-IT sources is more difficult to project, since the post1995 performance has been so uneven. We present a range of assumptions consistent with the U.S. historical experience. Our base case uses the average contribution from the period 19902004 and assumes a contribution 0.42 percentage point for the intermediate future. This assumes that the myriad factors that drove TFP growth through 2004 will continue – factors such as technological progress, innovation, resource reallocations, and increased competitive pressures. Our optimistic scenario assumes that the contribution for 1995-2004 of 0.59 percentage points per year will continue for the intermediate future, while our pessimistic case assumes that the
14 15
The product cycle refers to the time between new model introductions. See International Technology Roadmap for Semiconductors, 2004 Edition, http://public.itrs.net.
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U.S. economy will revert back to the slow-growth period from 1973-1995 when this contribution averaged only 0.09 percent per year. The final variable is the growth in capital quality, which reflects the shift toward IT equipment and software. A key difficulty is that the boom of the late 1990’s and the bust afterward are both unsustainable. Our base case uses the average rate of capital quality growth of 1.63 percent for 1990-2004. Our optimistic projection combines the unsustainably high capital quality growth of the late 1990’s with the slowdown during the recession of 2001 and the recovery that followed. As a result, we assume capital quality growth continues at the rate of 1.97 percent for 1995-2004, as firms continue to substitute toward relatively inexpensive IT assets. Our pessimistic scenario assumes that the growth of capital quality reverts to the 0.84 growth rate for 1973-1995. b) Productivity Projections Table 2 assembles the components of our projections and presents the three alternative scenarios. The top panel shows the projected growth of output and labor productivity. The second panel reports the five factors that are held constant across scenarios: growth of hours and labor quality and shares of capital reproducible capital stock, and IT output. The bottom panel reports the three factors that vary across scenarios: TFP growth in IT production, the TFP contribution from other industries, and capital quality growth. Our base-case scenario puts economy-wide labor productivity growth at 2.25 percent per year and output growth at 2.97 percent per year for the decade 2005-2015.
Projected
productivity growth falls short of our estimates for 1995-2004 as TFP, capital deepening, and labor quality growth slow, while output growth faces the additional drag of slower growth in hours. These projections reflect the slowdown in the pace of technological progress in semiconductors in the International Technology Roadmap and put the contribution of IT-related TFP slightly below that of 1995-2004 as the semiconductor industry returns to a three-year product cycle. Slower growth is partly offset by a larger IT output share. Non-IT TFP growth also makes a smaller contribution. Our optimistic scenario puts labor productivity growth at 2.79 percent per year and output growth at 3.52 percent per year, due to the assumption of continued rapid technological progress. In particular, the two-year product cycle in semiconductors is assumed to persist for the intermediate future, which drives rapid TFP growth in the production of IT equipment and
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software, as well as continued substitution toward IT assets and rapid growth in capital quality. In addition, non-IT TFP growth continues its rapid growth after 1995. Productivity growth is even more rapid than during 1995-2004 as capital deepening is enhanced by the strength of investment and slower growth in hours and labor quality. Finally, the pessimistic projection of 1.18 percent annual growth in labor productivity assumes that many trends revert to the sluggish growth rates of 1973-1995 and the three-year product cycle for semiconductors begins immediately. Even with the return to the three-year product cycle in semiconductors, slower labor quality growth, and slower TFP growth, the substantial share of IT implies that labor productivity growth will be close to the rates of the 1970s and 1980s when labor productivity averaged 1.4% per year for 1973-1995 (Table 1). Our base-case and optimistic projections suggest that the U.S. productivity resurgence will continue and is unlikely to revert to the sluggish pace of the 1970’s and 1980’s.
This
optimism reflects the observation that the fundamental drivers of the productivity gains like technological progress in information technology, a growing share of IT-production, and a more competitive and deregulated economy remain firmly in place.16 These positive effects, however, are likely to be moderated by demographic developments that will lead to a slower growth of labor input. c) Alternative Projections The trend of future economic growth is obviously critical for a wide range of public policy and private sector issues and considerable effort has been expended in this area. Within the U.S. federal government alone, for example, medium-growth projections are presented on a regular basis by the Congressional Budget Office (CBO), the Council of Economic Advisors ( (CEA) through the Economic Report of the President, and in the annual report by the Board of Trustees of the Social Security Administration (SSA).17
Give the uncertainties we have
emphasized, it is not be surprising that there is considerable divergence among estimates and that the estimates are frequently, and often substantially, revised. To provide some context for our
16
See Baily (2002) for a detailed discussion of the structural changes in the U.S. economy that contributed to stronger productivity growth. 17 See Stiroh (1998) for a review of these approaches. We do not consider the projections in the Analytical Perspectives of the Office of Management and Budget separately because they are virtually identical to those in the Economic Report of the President.
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results, we compare our estimates with other recent projections and then discuss the evolution of the detailed projections made by CBO. Table 2 reports estimates of the ten-year growth rate of GDP to be about 3.0 percent per year, divided between 0.7 percent hours growth and 2.3 percent growth in labor productivity. This is similar to the most recent projections by CBO (2005b), which estimates potential output growth for the overall economy to be 2.9 percent per year for 2005-2015. This reflects 0.8 percent potential hours growth and 2.1 percent potential growth in labor productivity. SSA (2005) is decidedly more pessimistic with an estimate of 1.7 percent for economywide productivity growth for the next decade as its “intermediate” scenario. To provide a range of possible trends, SSA also reports a “high cost” scenario of 1.5 percent and a “low cost” scenario of 2.0 percent for 2005-2015. Even SSA’s most optimistic projection falls below CBO’s baseline. SSA’s ten-year estimates correspond to the 1.6 percent, 1.3 percent and 1.9 percent projections for the more familiar SSA 75-year horizon. CEA (2005) presents an estimate of real GDP growth of 3.3 percent per year for the period 2004:Q3-2010:Q4. CEA does not explicitly break out an economy-wide productivity estimate, but does estimate non-farm business productivity to average 2.5 percent over the same period. This is faster than the full-economy projection we have presented as our base case, but similar to the private economy estimate of 2.6 percent in Jorgenson, Ho, and Stiroh (2004). It is also useful examine the evolution of the CBO estimates, which are based on a fullydeveloped growth model for the private economy and are updated semi-annually. Figure 3 plots the 10-year projection of GDP growth, full-economy productivity, and non-farm productivity from each Budget and Economic Outlook since the U.S. productivity resurgence began in 1995.18 This figure shows a steady rise in output and productivity projections during the economic boom of the late 1990’s and a more modest decline after CBO’s estimates peaked in January 2001 (CBO (2001)). With the full benefit of hindsight Figure 3 shows that CBO, together with virtually all observers, failed to anticipate the post-1995 productivity resurgence. As late as January 1997, for example, CBO (1997) projected potential GDP growth for the next decade at 2.1 percent per year and non-farm business productivity growth at 1.2 percent. By January 2001, however, ten-
18
Some point estimates are missing as the individual reports presented different material. See CBO (2005a) for a discussion of how data revisions impacted the productivity projections.
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year projections of potential GDP reached 3.3 percent, while economy-wide productivity rose to 2.3 percent and non-farm productivity to 2.7 percent. This increase reflected a combination of faster capital input growth and total factor productivity growth in the non-farm business sector. After several downward revisions to the data and the 2001 recession, CBO (2003) lowered its projection of potential GDP growth at the beginning of 2003 to 2.9 percent, economy-wide productivity to 2.0 percent, and non-farm business productivity to 2.2 percent. This reversal reflected declines in capital input and total factor productivity growth projections. The latest estimates, reported in August 2005 in CBO (2005b), showed similar potential GDP growth at 2.9 percent, but slightly faster labor productivity at 2.1 percent for the overall economy and 2.4 percent for the non-farm sector.
This reflects a “middle ground” view that the
acceleration of productivity since 2001 reflects a transition to a one-time increase in the level of productivity, rather than a permanent acceleration in the growth rate (CBO (2005a)). We emphasize that we are not criticizing any of the government agencies or questioning their methodology. Rather, these comparisons are made in order to highlight the inherent uncertainty in any projection exercise, including our own. Looking across the four baseline scenarios, we see a range of GDP growth projections from 2.9 percent by CBO (2005) to 3.3 by CEA (2005) and a range of full-economy productivity projections from 1.7 in SSA (2005) to 2.3 in our Table 2. Our overall conclusion, therefore, is one of cautious optimism. The point estimates reported in Table 2 suggest relatively rapid productivity growth over the next decade, but we acknowledge the high degree of uncertainty and potential for abrupt reversals due to macroeconomic shocks. In addition, the underlying economic data are subject to revision as better information becomes available. V. Conclusions The strength and resiliency of U.S. productivity growth since 1995 continues to surprise economic analysts. Despite a series of negative shocks that began with the bursting of the NASDAQ bubble in 2000 and continued through the current spike in energy prices, productivity growth has remained strong and has even accelerated in recent years. Indeed, the U.S. economy has not enjoyed such a lengthy period of sustained productivity growth for three decades. The estimates presented here show the critical importance of IT in this productivity resurgence. These gains come from both technological progress in the industries that produce IT equipment and software and continued substitution towards relatively cheap and highly
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productive IT assets in the industries that use IT intensively. There is also clear evidence of widespread gains in total factor productivity growth outside the IT-producing industries. Our projections suggest that U.S. productivity growth is likely to remain relatively rapid over the medium-term, but will slow somewhat as the economy moves toward a sustainable growth path and readily foreseeable demographic trends unfold. We emphasize, however, that there is considerable uncertainty in these projections. The future growth of productivity depends critically on factors like the evolution of semiconductor technology and business investment patterns which are difficult to predict. Nonetheless, there is little evidence to suggest that the technology-led productivity resurgence is over or that the U.S. economy will revert to the slower pace of productivity growth of the 1970s and 1980s.
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References Baily, Martin N. “The New Economy: Post Mortem or Second Wind?” Journal of Economic Perspectives, 16(2), Spring 2002, 3-22. Bureau of Labor Statistics. “Productivity and Costs, Second Quarter 2005, Preliminary,” USDL 05-2116, November 3, 2005. Congressional Budget Office. The Economic and Budget Outlook, Fiscal Years 1998-2007, January 1997. _____. The Budget and Economic Outlook: Fiscal Years 2002-2011, January 2001 _____. The Budget and Economic Outlook: Fiscal Years 2004-2013, January 2003. _____. The Budget and Economic Outlook: Fiscal Years 2006 to 2015, January 2005. _____. The Budget and Economic Outlook: An Update, August 2005. Council of Economic Advisors, Economic Report of the President, February 2005. Jorgenson, Dale W. “Information Technology and the U.S. Economy,” American Economic Review, 91(1), March 2001,1-32. Jorgenson, Dale W., Mun Ho, and Kevin J. Stiroh. “Projecting Productivity Growth: Lessons from the U.S. Growth Resurgence, Economic Review, Federal Reserve Bank of Atlanta, 87(3), Quarter Three 2002, 1-13. _____, “Will the U.S. Productivity Revival Continue?”, Current Issues in Economics and Finance, Federal Reserve Bank of New York, 10(13), December 2004, 1-7. _____, Information Technology and the American Growth Resurgence, Cambridge, the MIT Press, 2005. Jorgenson, Dale W. and Kevin J. Stiroh. “Raising the Speed Limit: U.S. Economic Growth in the Information Age.” Brookings Papers on Economic Activity, 2000(1), 125-211. Lammers, David. “65-nm Intel CPUs due in Late ’05.” EETimes, August 30, 2004. Oliner, Stephen D. and Daniel E. Sichel. “The Resurgence of Growth in the Late 1990s: Is Information Technology the Story?” Journal of Economic Perspectives, 14(4), Fall 2000, 3-22. _____. “Information Technology and Productivity: Where are We Now and Where are We Going?” Economic Review, Federal Reserve Bank of Atlanta, 87(3), Quarter Three 2002, 15-44 Social Security Administration, The 2005 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, April 5, 2005. Stiroh, Kevin J. “Long-Run Growth Projections and the Aggregate Production Function: A Survey of Models Used by the U.S. Government,” Contemporary Economic Policy, 16(4), October 1998, 467-479. _____. “Information Technology and the U.S. Productivity Revival: What Do the Industry Data Say?,” American Economic Review, 92(5), December 2002, 1559-1576.
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Table 1: Sources of U.S. Output and Productivity Growth 1959-2004
1959-2004 Output Growth (Y) Hours Growth (H) Average Labor Productivity Growth (ALP) Capital Deepening IT Capital Deepening Other Capital Deepening Labor Quality TFP Growth IT-related Contribution Other Contribution
1959-1973 1973-1995 1995-2004
3.34 1.38 1.96 1.04 0.39 0.65 0.28 0.63 0.21 0.42
3.96 1.55 2.41 1.16 0.19 0.97 0.34 0.91 0.08 0.83
2.84 1.46 1.39 0.81 0.37 0.44 0.28 0.30 0.21 0.09
3.59 0.95 2.64 1.43 0.78 0.65 0.19 1.02 0.43 0.59
1995-2004 less 1973-1995 0.75 -0.51 1.25 0.62 0.41 0.21 -0.09 0.72 0.22 0.50
Note: A contribution of an output or input is defined as the share-weighted, real growth rate. All estimates refer to the full economy. Source: Author's calculations based on BEA, BLS, Census Bureau, and other data. 11/17/2005 10:25
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Table 2: U.S. Output and Labor Productivity Projections Projections Base-case Optimistic
1995-2004
Pessimistic
Output Growth ALP Growth Effective Capital Stock
3.59 2.64 2.55
1.90 1.18 1.60
Hours Growth Labor Quality Growth Capital Share IT Output Share Reproducible Capital Stock Share
0.95 0.32 0.40 0.04 0.80
Common Assumptions 0.72 0.72 0.72 0.09 0.09 0.09 0.41 0.41 0.41 0.04 0.04 0.04 0.84 0.84 0.84
TFP Growth in IT Implied IT-related TFP Contribution Other TFP Contribution Capital Quality Growth Implied Capital Deepening Contribution
11.05 0.43 0.59 1.97 1.43
Alternative Assumptions 8.67 9.83 11.05 0.34 0.38 0.43 0.09 0.42 0.59 0.84 1.63 1.97 0.70 1.40 1.73
Projections 2.97 2.25 2.50
3.52 2.79 2.96
Notes: In all projections, hours growth and labor quality growth are from internal projections, capital share and reproducible capital stock shares are 1959-2004 averages, and IT output shares are for 1995-2004. Pessimistic case uses 1973-1995 average growth of capital quality, IT-related TFP growth, and non-IT TFP contribution. Base-case uses 19902004 averages and optimistic cases uses 1995-2004 averages. 11/17/2005 10:33
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Figure 1: U.S. Productivity Growth Nonfarm Business Sector, 1947:Q4-2005:Q3
7.0 6.0 5.0 4.0
Percent
3.0 2.0 1.0 0.0 1948
1953
1958
1963
1968
1973
1978
1983
1988
1993
-1.0 -2.0 -3.0
Note: Productivity growth rate is four-quarter average. Data are from BLS, November 3, 2005. NBER recession periods are shaded.
17
1998
2003
Figure 2: Productivity Growth over the Business Cycle 2001 Recession vs. Average of Earlier Recessions
Index
1.2
1.1
1.0 -6
-5
-4
-3
-2
-1
2001 Recession
0
1 2 3 4 5 Quarters since Recession Began 1973-2000 Recessions
6
7
8
9
10
11
12
1947-2000 Recessions
Note: Productivity series are normalized to equal 1.0 at the beginning of each recession. 1973-2000 Recessions averages over the four recessions during that period, while 1947-2000 Recessions averages over the nine recessions during that period. Data are for the nonfarm business sector from BLS, November 3, 2005.
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Figure 3: Evolution of CBO's Output and Productivity Outlook August 1995 to August 2005 4.0
3.0
2.0
1.0
0.0 Aug 95
Dec May Aug 95 96 96
Jan 97
Sep 97
Jan 98
Potential GDP
Aug 98
Jan 99
July 99
Jan 00
July 00
Jan 01
Full Economy Productivity
Aug 01
Jan 02
Aug 02
Jan 03
Aug 03
Jan 04
Sep 04
Jan 05
NFB Productivity
Note: Data are from various issues of CBO's Economic and Budget Outlook. Missing data reflect reports that did not explicitly state the point estimates.
19
Aug 05
