Productivity May Finally Be on the Rise, Economist Says

Maybe, just maybe, productivity will get off its hind-end. That’s the thesis of Joseph Lavorgna, who is encouraged by a recent uptick in the US productivity rate and sees artificial intelligence (AI) and the Federal Reserve as propellants.

In 2018’s fourth quarter, compared to the year-before period, productivity rose 1.8%, which is a lot better than the 1% average it has been running during the past few years. The long-term productivity growth average is around 2%.

But there’s hope that technological advances can re-ignite productivity gains. As Lavorgna, chief economist, Americas, for Natixis, put it in his research note: “Specifically, advances in artificial intelligence, robotics, and machine learning, just to name a few technologies, all could eventually lead to a step-up in output per hour.”

And the Federal Reserve’s apparent willingness to hold off on more interest rate hikes, at least for a while, is the additional tonic that this sanguine scenario needs, Lavorgna argued. “The good news is that the Fed’s ongoing ‘patience’ increases the probability of such a development occurring,” he contended.

Usually, higher corporate capital expenditures, or capex, is what drives improved productivity. That creaky old machine on the factory floor is replaced by a faster and more efficient model, for instance. Thus far, despite fitful and temporary increases, the long-hoped-for productivity renaissance hasn’t happened. For companies, deploying their cash for stock buybacks has been in vogue instead.

On the whole, most companies failed to boost capital spending much last year, a National Association of Business Economics (NABE) survey indicated. The NABE poll found that 84% had not stepped up their spending, even though they had reaped a tax cut to 21% from 35%. Of course, some companies, particularly in tech, have not stinted on capex, such as Google, which doubled its spending in 2018.

Still, as Lavorgna pointed out, technology improvements—and these are seldom confined to just tech companies—have a way of eventually boosting the entire economy. That obviously includes productivity, which is key to enhancing economic output and higher living standards. Early IT efforts bore fruit in the late 1990s and early 2000s, and productivity then surged to around 3% yearly.

Indeed, Lavorgna reasoned, if productivity does improve, the Fed could well feel justified in resuming its rate increases.

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