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US productivity growth lowest for a decade

Financial Times | January 23, 2007
Chris Giles

The US economy last year recorded its lowest rate of labour productivity growth in more than a decade, with growth in output per hour worked falling behind the EU and Japan. The fall casts further doubt on the ability of the Federal Reserve to cut interest rates as the US economy slows.

Research to be published on Tuesday by the Conference Board, the international business organisation, shows that US labour productivity in the whole economy grew by 1.4 per cent in 2006 as slower economic growth was combined with a rapid rise in employment.

Gail Fosler, the chief economist of the Conference Board, told the Financial Times that the fall in productivity growth was unlikely to be cyclical and the result of weaker gains in services' industries, raising "concerns about the long-lasting productivity impact of information and communications technology".

If weak productivity growth continues, she said, "even in a slow growth environment, the US economy will be performing close to its potential", restricting the Fed's ability to cut interest rates.

Better economic figures released this year, alongside emerging signs of a slowdown in US economic potential, has led to tumbling market expectations of a rate cut in recent weeks. Investors now believe that there is only about a 10 per cent chance of a reduction in official interest rates by the May meeting of the Fed's interest rate-setting committee, according to the Federal Reserve Bank of Cleveland.

The US slowdown in whole economy productivity growth over the past three years - to a rate half that in 2002 and 2003 - contrasts with rising productivity growth in Japan, on the back of a surge in manufacturing exports on the Conference Board's internationally comparable figures.

Japan's labour productivity grew by 2.5 per cent in 2006 as manufacturing companies took advantage of new demand from China in addition to its traditional export destinations.

Europe improved its productivity performance considerably last year as it enjoyed its first year of strong economic growth since 2000. However, the improvement in Nordic countries and Germany masked continued weakness in southern Europe, where growth was generated by surging employment rather than an improvement in the efficiency of the economies of Spain, Italy and Portugal.

The Conference Board recorded that productivity growth remained extremely high in emerging countries of China, India and Eastern Europe, as inefficient companies fell away and huge numbers of workers moved from relatively inefficient sectors such as agriculture to manufacturing.

China recorded 9.5 per cent productivity growth in 2006, while India achieved 6.9 per cent and the 12 new EU member states achieved 4.1 per cent growth.

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