I think it is a temporary setback caused by the economic slowdown. Greenspan has indicated that massive investments by businesses in computers and other productivity-enhancing equipment in recent years has permanently improved the outlook for productivity. From 1973 through 1995, productivity averaged lackluster gains of just above 1 percent per year. But since 1995, increases have more than doubled, allowing companies to pay workers higher salaries without raising the prices of their products. Yamarone and other economists viewed the first-quarter productivity performance as a byproduct of a slowing economy, which grew at an annual rate of 1.3 percent in the first quarter, far more slowly than the 2 percent rate the government previously estimated.
Many analysts expect productivity to rebound as the economy recovers.
The Fed has cut interest rates five times this year and many economists are hopeful the central bank's aggressive action will permit the economy to stage a turnaround by the end of the year. He and others were encouraged that over the 12 months ending in March, productivity rose a solid 2.5 percent. In the first quarter, employees' output went up but their hours worked grew twice as fast, leading to a decline in productivity. The drop in productivity boosted unit labor costs, a gauge of inflation pressures, at an annual rate of 6.3 percent in the first quarter, after a 4.5 percent rate of increase in the fourth quarter. The revised first-quarter jump in unit labor costs marked the biggest increase since the fourth quarter of 1990.