Productivity growth figures have been in the doldrums since the Great Recession hit. They’ve averaged about half the growth of the decade before the recession. There are two theories as to why, and depending on which one prevails at the Federal Reserve, productivity numbers could bolster the case for or against an interest rate hike.
The previous two quarters, which were both negative, raised concerns about a potential ramp-up in inflation. Productivity sluggishness comes amid two other key factors: wage growth that is barely outpacing inflation and a falling unemployment rate.
That’s an unusual set of circumstances, says Tom Kochan, an employment researcher at MIT. “There’s a lot of room for productivity growth,” Kochan says. “But it requires a business strategy that says, ‘Let’s invest.'”
And so, the first theory as to what’s holding back productivity is the lack of such investment on things like new factories and equipment. Productivity growth suffers if workers are stuck with old tools. The good news, says Kochan, is that such investment may be picking up, which would bolster the argument to keep interest rates low to encourage that growth.
But the second theory argues that the current state of things is the new normal, says Josh Bivens, the research and policy director at the Economic Policy Institute. The case for that, he says, is that “there did seem to be deceleration of productivity growth even before the Great Recession hit.”
Bivens says if the Federal Reserve agrees with the “new normal” theory, it could raise interest rates quicker. But, if the “business investment” theory prevails, to which he also subscribes, “It’s just one more problem that will be solved by getting the economy back to full health. The best way to ensure it gets back to full health is to keep interest rates low.”
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