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Recent productivity growth no cause for relief

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A weekly presentation of downloadable charts and short analyses designed to graphically illustrate important economic issues. Updated every Wednesday.

Snapshot for August 22, 2001.

Recent productivity growth no cause for relief
Productivity growth is considered the best indicator of an economy’s efficiency, and last quarter this key measure grew by 2.5%. Some have taken this growth as a sign that the economy’s current slowdown is reversing course. Unfortunately, evidence from past business cycles challenges this optimistic interpretation.

Productivity growth equals output growth minus the growth in hours worked. In a strong economy, this occurs when both output and hours increase, but output grows faster. But as the chart illustrates, productivity can also grow in a slowdown or recession, when a decline in hours outpaces weak or nonexistent output growth.

Growth in hours, output, and productivity

The chart shows growth in productivity, output, and hours over three different periods. The first two periods show the changes in these measures during recessions (as determined by the National Bureau of Economic Research, the group that dates recessions). The last period examined is the most recent four quarters.

As the figure shows, it is not uncommon for productivity to increase during a recession. 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.

This is clearly the case in the most recent quarter, when the 2.5% growth in productivity was a function of flat output growth and sharply falling hours. As history demonstrates, productivity gains of this sort are more commonly a trait of recessions than a sign of good news.

This week’s Snapshot by Thacher Tiffany and Jared Bernstein.

Check out the archive for past Economic Snapshots.


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