*Productivity Paradox Result of Freaked Out Economy

Is this another New Economy?
Overshadowed somewhat by the drumbeat of negative news on employment, output and spending was news Thursday that U.S. productivity grew 2.8% in 2008, the fastest since 2003.
That’s strong even in an expanding economy. In a severe recession it’s practically a miracle.
Every recession going back to World War II has had at least one quarter when productivity shrank. And in some cases, during severe recessions, there were a few. Except this time.
Not only has productivity in the nonfarm business sector been positive since late 2007 when the recession officially began, growth rates have been sizable, rising 3.2%, at an annual rate, during the fourth quarter even as the economy shrank 3.8%.
“We’re experiencing this paradox,” said Harvard University Professor Dale Jorgenson, an expert on productivity. The economy is in a downturn, he explained, “at the same time it’s becoming more competitive.”
A decade ago, the explanation for the productivity boom was clear: Information technology and, in particular, the manufacture of IT equipment was fueling the rise in economy-wide efficiency.
Then, following the 2001 recession, productivity leapt higher again in sort of a second New Economy. The reason didn’t seem as clear initially. But economists eventually concluded that the spreading out of IT gains to the service sector — particularly wholesale and retail trade (dubbed the Wal-Mart effect) — was one source of that second leg-up.
During the previous two episodes, productivity gains created entire new industries, millions of jobs and hundreds of billions of dollars in new wealth. They coincided with tranformational change in the economy. Employment grew, but output expanded even faster.
But this time is different. Companies may be running more efficient shops, but it’s not expanding the economic pie. In fact, productivity may be shrinking the pie in the short run by kickstarting a self-feeding spiral of job and spending cuts.
In other words, following two mild recessions by historical standards — in 1990-91 and 2001 — companies this time have essentially thrown in the towel early without waiting to gauge how the downturn unfolds, as evidenced by another climb in new jobless claims at the end of January to over 600,000 — nearly double where they were one year ago.
That’s why even though business output fell last quarter at a 27-year high, hours worked plunged the furthest since 1975.
So it’s not another New Economy. It’s more of a Freaked Out Economy.
In the short run the result is the same: productivity is bucking its once procyclical nature, which means it tended to rise during expansions and drop in recessions. One other notable exception, besides now, was the 2001 downturn.
The interplay between employment and productivity will be key in 2009. If recent productivity growth simply reflects front-loaded job cuts, then some of the old dynamic may return with employment stabilizing and productivity gains fizzling.
That may make things feel better in the short run, but the eventual recovery might not be as long-lasting as in the 1990s and 2000s, unless a new source of productivity besides nimble labor markets emerges. –Brian Blackstone