Pro Perspectives 11/6/23






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November 06, 2023

As we discussed in my Thursday note, the productivity data continue to reflect a productivity boom.

This comes from a tight labor market, as employees are doing more with less, and employers have been forced to innovate/adopt new technologies.  Add to this, we are in the first inning of generative AI, which might be the most productivity enhancing technological advancement of our lifetime.

With that, as we also discussed in my last note, high productivity growth is a driver of long-term potential economic growth

Powell gave a speech on it in 2016.  Bernanke, when he was Fed Chair, constantly blamed weak productivity growth as holding back the post-GFC economy.  Yellen did too, during her term, also attributing weak productivity growth to weak wage growth.

Now, here we are, getting the hottest productivity gains since 2007 (excluding the skewed pandemic data).  The Fed should be very pleased.  

But it seems the current Fed Chair, Jerome Powell, is now disinterested.  He barely utters the words.  In fact, scanning back through all of the post-FOMC press conferences this year, he has uttered the word “productivity” a whopping four times.

Why so apathetic?  After all, high productivity growth contributes to economic growth, without stoking inflation.  Remember, the annual growth in the cost per unit of output last quarter was negative!  Productivity gains more than offset wage gains. 

What does it mean? 

It means the Fed should be encouraging dramatic wage gains, to close the gap with the rise in the level of prices over the past three years (to restore living standards).

As Powell has said in the past, wage gains should equal productivity gains plus inflation. 

With that, wages should be growing at double the current 4.2% year-over-year rate.

This is all a formula to recalibrate (higher) the “growth potential” of the economy.  The Fed knows it (well documented through past presentations), yet has in its own projections a long-run economic growth outlook of just 1.8% (the so called “new normal” low growth).

Perhaps this perception manipulation is why the economist and Wall Street forecasts have embarrassingly and dramatically undershot on actual economic growth — and why they continue to chatter about a “slowing economy” if not one teetering toward recession.

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