Fed sees a glimmer that recent US productivity gains may last
2024.12.16 07:10
By Howard Schneider
WASHINGTON (Reuters) – Dreanda Cordero reentered the job market this year after a five-year break to raise three children, landing a data entry position she was not thrilled about that required on-site work she had trouble juggling and coincided with health troubles of her own and one of her kids.
She quit after two months.
But her next step demonstrated why some Federal Reserve officials see the U.S. job market as not only healthy but perhaps contributing to rising productivity they are coming to believe may persist: Within a week the 33-year-old human resources professional accepted a job as a recruiter with a pool equipment operator that allowed her to work from home in Pennsylvania in her area of expertise – a sweet spot, she feels, for high performance.
“This job allows me a little more flexibility to take care of myself and my kids,” she said. “I have the ability to learn, and I have that challenge – that’s why it’s a better fit. They push you, and there is more potential for growth.”
When Fed policymakers gather this week for their last meeting of the year, the focus will be on an expected quarter-percentage-point interest rate cut and policymakers’ updated outlooks for the economy and rate cuts.
But influencing those discussions and the longer-term arc of monetary policy is an emerging debate about productivity and how fast output can grow without stretching the economy’s capacity and generating inflation above the Fed’s 2% target.
Notoriously volatile in the short-term yet anchored to seemingly stable long-term trends, the annual growth rate in U.S. worker output per hour since 2019 has climbed to an average of about 1.8% from roughly 1.5% in the prior decade – and recently has run even higher.
Even such small improvements become significant if compounded over time, and the boost has occurred early in the spread of artificial intelligence tools that could be poised to add to it.
The implications could be profound, influencing everything from the trajectory of federal debt to the impact of coming Trump administration policies. Labor shortages that follow an immigration crackdown, for example, could be more easily absorbed in an environment of rising productivity, something Vice President-elect JD Vance seemed to envision in a New York Times (NYSE:) interview last summer when he spoke of McDonald’s (NYSE:) workers being displaced by kiosks and moving on to better-paying jobs.
‘SOMETHING IS HAPPENING’
The improvement has shown enough persistence that one U.S. productivity model recently began to flip from a near 100% certainty the U.S. was locked in a “low-growth” regime to a likelihood of less than 60%.
“It’s still to early to say whether there’s a genuine shift, but it definitely looks more possible,” said James Kahn, an economics professor at Yeshiva University in New York and a former New York Fed vice president for research.
“There are some reasons for cautious optimism,” John Fernald, an economics professor at INSEAD in France, wrote in a recent note published by the San Francisco Fed, where he once worked as an economist. It was a limited but important acknowledgement from one of the Fed’s more influential voices on productivity and a skeptic that the numbers would move beyond the long-run trend.
That possibility, however, is being taken more seriously among Fed officials, and could influence policymakers’ thinking about the economy’s potential. Fed estimates of the sustainable long-term rate of growth for the U.S. had been steadily downgraded in the years before the COVID-19 pandemic, in part because of lagging productivity.
But economic growth has regularly exceeded the Fed’s own estimates of potential, and over the past two years that has continued even as inflation has eased. Productivity has played a role, and if recent trends continue it may require a rethink about the economy’s direction and the underlying inflation associated with any pace of growth. It could also lead to higher estimates of the long-run “neutral” interest rate that U.S. markets can sustain.
According to the minutes of the Fed’s Nov. 6-7 meeting, that reevaluation is underway, with staff upgrading internal estimates of the economy’s potential, and policymakers debating whether the recent trends will stick.
“I can’t tell you how difficult it is to move productivity over its long-term trend,” Fed Governor Lisa Cook said last month.
Cook, whose economic research has focused on innovation, said the shift higher in recent years is both statistically and economically significant.
“Something is happening,” she said.
‘HUGELY IMPORTANT’
Like other Fed officials, Cook cited several possible causes: The more efficient job matching that allowed Cordero to find a better use of her skills; sustained high levels of business formation that took off during the pandemic; and AI investments that may be poised to keep the trend going.
“We have to start taking seriously the idea that this thing is continuing,” and sort out the policy implications, Chicago Fed President Austan Goolsbee said earlier this month.
“There are business people who say … it’s been so hard for them to hire. They’ve put in machines. They’ve done labor-saving technologies precisely because they couldn’t find people,” Goolsbee said. “I do think on the ground, there’s some evidence.”
Productivity is a magic bullet of sorts in economics, not quite a free lunch given the investment and innovation needed to increase, but something that lets workers produce more with less time or fewer resources, and as a result allows wages and profits to rise without stoking inflation.
Improved productivity has been one of the things keeping unit labor costs under control and in line with the Fed’s inflation target even as wage growth has stayed above what policymakers see as non-inflationary.
It is one reason the Fed has felt comfortable continuing to reduce rates even as economic growth has remained above trend and the unemployment rate reasonably low.
The question now is whether and how long it can continue.
Earlier this month Fed Governor Adriana Kugler said recent strong productivity had been “hugely important” for the economy and the central bank, but cautioned that coming changes to global tariff and trade policies could put that at risk.
“The incoming administration and Congress have not enacted any policies yet, so it is too early to make judgments,” Kugler said. But “studying the specifics, when they come out, will be important, as trade policy may affect productivity and prices.”
