Isn't there a law somewhere that asserts that every party (as in a social gathering) has an insignificant probability that there will be party-poopers lurking around - tediously recounting petty exploits, alternatively breaking the family china or if you choose to go down the age scale a little, hurling copiously on the living room carpet. It certainly holds with remarkable consistency in the world of economics. Take the case of growth in the US. Just as financial markets were getting comfortable with the fact that the US had got back on an uninterrupted path to recovery, macro numbers started looking flaky. Gross domestic product (GDP) for the first quarter of this year printed at a piffling 0.1 per cent, well below what most analysts had expected. The consensus forecast was around 1.2 per cent
But before jumping to too many dire conclusions, it might be wise to view these disappointing numbers purely as a result of an ephemeral supply shock. The US went through a particularly severe winter that crippled economic activity for relatively long periods and that could be the sole factor that explains the sub-par growth. The weather, one could argue, affected virtually every bit of activity and data point that goes into explaining GDP. New home sales were down sharply possibly because potential buyers preferred to stay at home during the polar freeze and abandoned their house-hunting plans. Auto sales slumped for the same reason as did business investments since it was simply too inclement to grab the shovels and keep projects going. Exports declined as well. However, this was perhaps not due to weak external demand. Exporters could not get their shipments to the ports in January and February. The fact that this quarter saw the last bit of fiscal tightening also did not help matters. However, better weather and fading fiscal tightening is likely to help going forward.
There are a couple of implications of viewing first quarter's GDP growth rate from this perspective. First, it would be incorrect to extrapolate growth rates for the rest of the year from this single data point. Most analysts expect a bounce in the growth rate from the second quarter. However, the slip in the first quarter could pull the overall growth rate for the year down from earlier estimates. Second, this "growth shock" will be treated as a transient phenomenon by policymakers, especially the US Federal Reserve. Thus, it was not surprising that when the Fed's powerful Open Market Committee met last week, they pared the size of bond purchases under their quantitative easing programme by yet another $10 billion.
However, if there is something that the US needs to worry about, it is the decline in productivity that is becoming visible in the data. A couple of things need to be made clear. Productivity here refers to total or multifactor productivity growth or the "Solow residual". This "residual" measures the change in output growth that cannot either be explained as infusions of capital or increase in the workforce. The worrying bit is that this dip in productivity growth seems to be broad-based - affecting a whole swathe of industries. Here are some numbers. According to the Bureau of Labor Statistics, multifactor productivity growth was 1.4 per cent between 2000-2007. In the 2007-2014 period, it halved to 0.7 per cent
It is tempting to see some connection between the financial crisis and the dip in productivity growth. Ben Bernanke, for instance, argues that the drop was possibly due to a slowdown in innovation that came on the back of the credit squeeze that followed the financial crisis. In other words, the dip in productivity is cyclical. There are a couple of problems with this. As Paul Ashworth of the influential think tank Capital Economics points out (US Economics Focus, April 22, 2014), the drop in productivity growth predates the onset of the financial crisis. Besides, after a brief squeeze on R&D spends that indeed followed the crisis, they have picked up without any impact on productivity growth.
Ashworth argues that the decline in productivity growth is structural and will linger for a while to come. He attributes it to factors like the fading impact of the IT revolution (at least a lull in its contribution to enhancing firm and worker efficiency) and an ageing workforce. There is, he claims, some micro-level evidence to show that productivity growth declines once a worker crosses 50. The 50-plus cohort is now becoming an increasing share of the American workforce.
This is not an esoteric academic debate. If the slowdown in productivity growth is structural, it will tend to cap US' trend rate of growth. If, for instance, multifactor productivity growth stays at around 0.7 per year, it would be difficult for the US' trend rate of growth to pick up significantly above two per cent. If, as the Bernanke camp believes, it's more short term and cyclical, the US has a better chance of climbing over this barrier.
The writer is with HDFC Bank.
These views are personal
These views are personal
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
