The Economy’s Odometer Is Broken

The pace the economy can grow at without overheating depends on how productive it is. But productivity figures have turned into a real mess.

By Justin Lahart of The WSJ. Excerpts:

"American workers shook off their winter blues and got more productive in the second quarter. But don’t be too quick to proclaim that a new era of productivity has emerged.

The Labor Department on Thursday reported that U.S. productivity, as measured by what a typical worker produces in a typical hour, grew at a seasonally adjusted 3.7% annual rate last quarter from the prior quarter. That came on the heels of a 2.1% decline in the first quarter, a 1.6% increase in the fourth quarter last year and…well, you get the picture. Productivity figures, which have always been volatile, have been a complete mess since the pandemic hit.

That in turn presents a problem for the Federal Reserve: If it doesn’t have a good sense of what productivity is doing, it doesn’t know how fast the economy can grow without inviting too much inflation."

"One reason the U.S. economy has been so successful, historically, is that through its embrace of innovation America delivered efficiency gains that allowed workers to produce more. But in the years before the pandemic—really, since the collapse of the dot-com bubble—productivity growth has been mediocre."

"Not long after the pandemic struck, there were hopes that the ways workers and businesses met that challenge would kick-start higher productivity growth. People became more adept at videoconferencing, for example, which meant they could spend less time traveling to client meetings, and more time doing something meaningful. Restaurants embraced QR codes for menus and bills. And indeed, through the end of 2021, it looked as if there was a big step up in productivity.

But in a lot of it was a mirage, driven by the massive job losses and other distortions the pandemic created. Take hotels and motels, for example. In 2021—the latest period Labor Department data is available for—their productivity jumped by 25.2%. But while they might, in fact, have gotten more efficient, this was probably because there weren’t as many people working room service, the front desk and so on—a situation that, while temporarily bearable for guests, wasn’t sustainable."