The Recent Rise and Fall of Rapid Productivity Growth

Information technology fueled a surge in U.S. productivity growth in the late 1990s and early 2000s. However, this rapid pace proved to be temporary, as productivity growth slowed before the Great Recession. Furthermore, looking through the effects of the economic downturn on productivity, the reduced pace of productivity gains has continued and suggests that average future output growth will likely be relatively slow. The past decade has been wrenching for the U.S. and global economies. In the depths of the Great Recession, the U.S. unemployment rate rose to 10%, reflecting an economy operating far short of its potential. As the effects of the Great Recession have receded, it is important to know how fast the economy can sustainably grow going forward. This Economic Letter explores trends in productivity growth—a key contributor to this sustainable pace. A recent paper by Fernald (2014a) finds that the exceptional boost to productivity growth from information technology in the late 1990s and early 2000s has vanished during the past decade. Although there is considerable uncertainty, a relatively slow pace is the best guess for the future. The slowdown in productivity growth before the Great Recession Output grows because of a rise in hours worked, productivity (output per hour), or both. Figure 1 shows that the contributions of both hours and productivity have varied over time for the U.S. business sector. From the early 1970s through 1995, productivity rose about 1 % per year. Between 1995 and 2003, that pace more than doubled to a rate that was comparable to its fast pace before 1973. Considerable evidence suggests this acceleration in the late 1990s reflects the production and use of information technology (IT). We will return to the IT story in the next section. Over the past decade, however, the exceptional pace of productivity growth has disappeared, returning to roughly its pre-1995 pace. In particular, productivity growth since the beginning of the Great Recession is similar to the average rate over the four years leading up to the recession